First, to motivate the discussion:  Why should greater inequality bother us?  There are several legitimate reasons.  First, to put it in the mildest terms (using the word of two theoreticians in taxation going back more than half a century), extreme inequality is “unlovely.”  Few – even those who take great satisfaction in their own relative achievement – like to be confronted with others living painful lives.  And there is even an element of self-interest in shared success.  If you believe that our society will respond to people living below some level of income – even if you may not agree with that response – your own tax burden will be less if everyone succeeds in some measure.

Greater concentration of income means a narrower consumer base; and anything that stands on a narrower base becomes less stable.  In this connection, fewer decisions by fewer people – or fewer unexpected declines in people’s prospects – could have a bigger impact on the prospects for the whole economy.  There can even be an economic case that the decline of a mass market reduces the need for investment, which over time snowballs negatively into continuing reductions of income and output (relative to what otherwise could be achieved).

And over the very long haul, increasing concentration of income and wealth can reduce the initiative and motivation of generations of the most successful – the very people who might be expected to lead the way to continuing growth and prosperity for society as a whole.  The extreme vision would be an uninvolved economic aristocracy, living luxuriously just by clipping coupons.  But we could imagine a far less outrageous but nearly as damaging pattern in political “rent seeking,” in which those who have made fortunes from the innovations of yesterday use their wealth to seek legislative and regulatory protection against competition from the innovations of today and tomorrow.  There are many examples of such behavior in the past and around the world.  We 21^st century Americans tend to think of ourselves as exceptional, and immune to such temptations that would lead to hardening of the societal arteries.  But the history books would tell us that we would need to be truly exceptional to avoid that fate.

And at the very least, perceptions of growing inequality have had a corrosive effect in the public square.  The shouting that we hear can drown out rational discussion and debate over very real national problems in the economy and other spheres.  It can make adversaries of people who should be allies and partners, before they even meet.

So there is valid reason to be concerned about excessive inequality – understanding that “excessive” is an arbitrary standard.  And for that matter, there is ambiguity in any measure of inequality – which ambiguity is worth some exposition.

In recent years, the most commonly referenced measure of the distribution of income has come from the Congressional Budget Office (CBO).  In years gone by, scholars used figures from a Census Bureau annual survey.  With all respect to the good people at Census, their numbers suffered from both the voluntary nature of their survey, and its uniform sample of the population.  As a result, few people with very high incomes would be included in the survey in the first place, and at least some would refuse to participate.  The Census Bureau would make every feasible statistical adjustment and still be far from a detailed picture because of pure lack of information.

The Congressional Budget Office instead marries to the Census data an unidentified sample of federal income tax returns.  Filing an income tax return is not voluntary (as you probably know).  And the sample of tax returns is stratified by income, which is to say that it includes more observations with very high incomes (with reduced statistical weights, to keep the result representative), and fewer observations (with larger statistical weights) of the about-average-income, two-spouse, two-kids, one-dog, almost-all-income-from-wages-and-salaries households.  The average-income families tend to be quite similar one to the other, and so fewer statistical observations provide all of the information needed.  In contrast, the few higher-income households have unique individual characteristics that cannot be as well represented by averages.  Still further down the income scale, many households with modest incomes are not required to file income tax returns, but the CBO method uses the information from the Census sample to represent them.  Thus, the CBO data have distinct advantages in investigating inequality, even with the qualification that they are formed by a statistical (shotgun) marriage between two independent data sources.

And what CBO has found, over the lifetime of their data file (which extends back to 1979), is a distinct increase in income inequality (as shown in the following chart).  Between 1979 and 2007 (hold the thought of 2009 for a moment), the share of total income of the top 1 percent of households more than doubled – from 8.9 percent to 18.7 percent.  And as you might imagine from that enormous jump, it really was “the 1 percent” of popular rhetoric where all of the action occurred.  The share of those from the 96^th through the 99^th percentiles grew, but only from 11.3 percent to 12.7 percent.  All of the other shares, for every group from the 95^th percentile on down, declined (by the arithmetic mirror image of the increases in these two higher income groups).

Looking at these data in another way, the average income (in inflation-adjusted 2009 dollars) within the 96^th to 99^th percentile group grew from $166,800 in 1979 to $315,800 in 2007 – a healthy near-doubling.  But the growth among the highest 1 percent was from $523,300 to $1,917,200 – a near-quadrupling.  (The average growth for the population as a whole was from $61,900 to $101,000, or 63 percent – obviously driven by these upper-income groups, with much less growth lower on the income scale.)  So again, the top of the tree grew very rapidly over those years – strikingly so, to just about everyone; offensively so, to some.

But should we take those figures at face value?  Are there reasons to question their significance?  There are, and we should discuss just a few.

For perhaps the most fundamental consideration, each year of data is a snapshot.  The people in the top 1 percent – and the bottom 20 percent – in one year are not necessarily the same people in the following year, or five or ten years hence.  Some would go so far as to say that the income ranking in any one year is irrelevant, because people may be on randomly different rungs of the ladder in the next year.

If a household’s income in each year were a random draw, that argument would carry enormous weight.  However, incomes are quite far from random from one year to the next.  For example:  A disproportionate share of the lowest income quintile is elderly households.  People who are too old to chart upwardly mobile careers and have little income other than Social Security are unlikely to bounce up the income rankings in a later year.  Similarly, a disproportionate share of the income of those at the top of the ladder is income from capital (as opposed to income from labor).  Although a household that has accumulated considerable wealth could conceivably lose it, the probability of that unhappy occurrence is relatively low.  Some mobility would come from, for example, young families with one or two adults living on limited incomes while attending graduate or professional school.  (I have memories.)  But the subsequent advancement of such families would be quite predictable – many would have parental roots at higher levels of income – and as they progressed in future years they would be replaced at the bottom of the ladder by others following the same path.

The U.S. economy certainly does have meaningful mobility, beyond the predictable ascensions and re-ascensions just described.  There are plenty of bootstrap anecdotes to discuss, and there are subtleties in these data as well.  But recent evidence suggests that mobility in the United States actually is less than in most other developed countries (see here and here for examples). Looking between generations, parental success (or the lack thereof) is a strong predictor of the next generation’s educational and economic success (or the lack thereof).  So the snapshot income-distribution data should be understood to have conceptual limits, but should not be disregarded on that ground.

There are at least two further limitations of these income distribution data.  One is the handling of employer- and government-provided in-kind benefits, most notably health insurance.  CBO attributes to households the value of such health benefits.  This is eminently reasonable, especially in assessing the relative well-being of two households at the same time; if one household receives health coverage from a breadwinner’s employer and another does not, a simple comparison of the cash income of the two would clearly understate the standing of the former.  But including the employer contributions may not comport with people’s conceptions of their own well-being over time.  An employee who was told that the cost of his health insurance was to increase substantially in the next year, but that his employer would pick up the tab, surely would be grateful.  But if the same employee then were told that as a result his cash wage would be unchanged – or even decrease – in the next year, he or she quite likely would not feel better off.  People tend to incorporate their health insurance (and their good health) in their personal “baselines,” and to require an increase in spendable cash income on top of that to conclude that their standards of living have improved.

The significance of this factor is that this simple parable of rising employer-paid health-insurance premiums coupled with near zero – or even negative – increases in cash wages is not far from the truth.  By CBO’s measure, middle-range incomes have not increased very much in recent years – but even this limited increase includes employers’ increased contributions toward employee health insurance.  Thus, during the hours when the typical U.S. private-sector employee is not studying the footnotes and methodological appendices to CBO documents, he or she probably feels much less optimistic about his or her economic lot than CBO’s income distribution statistics would suggest.  For those at the top of the income tree, the cost of an annual health-insurance policy is far less material to perceived well-being.  In this respect, therefore, middle-class demoralization about slow income growth, and even potential resentment about widening income inequality, may be worse than the numbers would suggest.

There is at least one more knotty methodological conundrum behind these income distribution data.  Much of the cash flow of very-high-income households comes from sales of assets, including both capital gains and capital losses.  CBO includes these net realized capital gains in a household’s income for purposes of the income distribution statistics.  This is a highly imperfect measure.  A household can choose either to realize an accrued capital gain or not.  Arguably, the household is equally well off in either case.  However, for purposes of the CBO statistics, a household that chooses to realize an accrued capital gain is shown to have a higher income than another that might not realize the same accrued gain.

The Census Bureau, in its long-standing income-distribution data series, does not even ask for the amount of realized capital gains.  That is not the correct methodological answer either.  A household with more wealth than God that supported itself solely by trading growth stocks would honestly answer the Census Bureau’s survey questions by saying that it had an income (as defined by Census) of zero – obviously not informative.

The right answer would seem to be to include in measured income the increase (or decrease) – realized or not – in the value of the household’s total portfolio over the year.  But such information will never be available; it is not required on the income tax return, and it would be incredibly burdensome (and likely never reported accurately) in a household survey.  (The Federal Reserve does undertake a detailed survey that includes asset values, but they do so only every three years, and the sample size is smaller than the Census Bureau’s.)

So with that limitation in mind, note that the CBO data showed a big drop in the income of the top 1 percent between 2007 and 2008-2009 – and that much of that drop came from a sharp reduction of realized capital gains.  That surely came in part because of the drop in financial market values; there certainly was less accrued gain to realize.  But at least in theory, some of that drop could have come from wealthy households simply holding on to well-selected assets, rather than selling them.  It also could come from such households realizing capital losses; even though the net losses (over $3,000) would not be deductible in the initial year, those losses could be carried forward to offset gains in later years.  And market values are what they are; a household that traded one asset that had declined in value for a similar but not identical asset that also had declined in value would not be losing any market value, in the greater scheme of things, while it would acquire the tax loss to carry forward.

The fluctuation of realizations of capital gains is a reason why these income distribution figures should be followed over time, without excessive weight given to the numbers for any one particular year.  The sharp decline of incomes in the upper tail of the distribution during the financial crisis likely will have been reversed in the market recovery of the last few years once the numbers are available.  Cycles should not be assumed to be eternal trends.

Any discussion of the ins and outs of income distribution statistics could go on far longer, and touch many additional conceptual and methodological issues.  But considering just the points above, if anyone were truly to obsess over the inequality statistics, he or she might conclude from those last two years of the CBO data that a crash is a good thing.  After all, it did reduce the relative share of total income of the “1 percent.”  Of course, in so doing, it reduced the absolute levels of income of the other 99 percent as well.  Historically, the period of the strongest sustained income growth for all groups – the 1990s – still saw growth in the relative share of the highest 1 percent.  So what do we want: superficially more-equitable income distribution statistics, or a higher standard of living for all Americans?

At bottom, we all are in this together.  Economic growth is not a zero-sum game.  As rank-and-file workers benefit from the creation of new jobs, those who create those jobs will benefit as well.  That is not a bad thing.

Even many economists who feel genuine concern about the trend toward greater inequality think long and hard before recommending remedies.  Interventions in markets to reduce competitive high returns can entail serious unintended consequences – potentially far beyond merely dulling incentives to work and invest.  Entire industries and channels of innovation can be slowed, to the ultimate detriment of the entire economy.

We certainly need a fair income tax, so that people on different rungs of the income ladder are treated equitably relative to one another.  That entails judgment; there are no simple mathematical formulas that state the one right degree of progressivity in our tax system.  We need to have that conversation; perhaps now, given the broad consensus that the current income tax is both unfair and detrimental to economic growth, we can begin to tackle this tough issue.

There is no objective measure, but to some pairs of ears, the dissension over the very nature of our economic system now is more discordant than at any time in memory.  Our proximity to economic and financial crisis leaves open the risk that the nation could act in desperation and haste, and do serious and perhaps irreparable damage to our prospects and our prosperity.  CED’s Trustees have undertaken a project on “sustainable capitalism” that we hope will help to head off this and other risks.  Thanks to all of our Trustees for their efforts on behalf of our mission of equal economic opportunity and long-term economic growth.

In a prominent cheer, Paul Krugman in the New York Times announced that “The Geezers Are All Right.” Various news stories portrayed the campaign for a budget “grand bargain” to be dead.

I don’t see it quite that way.  I will concede that the prospects for a fiscal deal in Washington are perhaps even a little more dead than they were before the reports.  But the good news in the Trustees’ reports goes no further than buying Washington a little more time – and perhaps not as much time as Washington needs to head off the ultimate, unavoidable (as even Krugman acknowledges) Social Security and Medicare problem.

To start with a broad overview of the reaction:  What you see in the mirror of the Trustees’ reports depends heavily on who you are – and in particular, what you believe about the meaning of the Social Security and Medicare Trust Funds.  The people who reacted most positively and strongly to the reports were those who believe that Social Security and Medicare can pay their benefit obligations with their trust funds, and the full-faith-and-credit Treasury special certificates in those funds.  Those who reacted most skeptically believe that the assets in those trust funds cannot costlessly be realized to meet the benefit obligations of those programs.

In the interests of full disclosure, I personally like the trust fund concept for Social Security and Medicare, for two reasons.  First, the existence of the trust fund probably reinforces the sense of an earned benefit.  Many unsophisticated elderly who have worked a lifetime at low wages, often in rural areas, need and deserve public support but would be compelled by their pride to refuse “welfare.”  They accept Social Security benefits determined by a highly progressive formula, however, because they believe that they earned those benefits.  Obviously, that advantage must be tempered by the sense of entitlement on the part of some less needy, but I personally would accept the advantage and struggle with the qualification through other public policy means.

Second, over many years, the perceived need to maintain an adequate trust fund has imposed discipline on the program.  If an elected policymaker wanted to increase benefits, he or she had to find a way to raise the revenues to pay for them.  One can only imagine the costly pandering that would have occurred over decades if Presidents and senior Congressmen could have painlessly increased benefits in every year evenly divisible by two.  Unfortunately and ironically, that discipline jumped the rails after what in many senses was an enforcement of extreme discipline in the emergency rescue of Social Security in 1983.  Rather than maintaining a steady modest surplus, as had been the practice, that legislation created the notion of “pre-funding” future obligations with the accumulation of an extraordinarily large reserve.  It even is possible that for a few years thereafter that policy reduced what otherwise would have been even larger and more-irresponsible budget deficits – because it managed to increase aggregate revenues, under the guise of dedicated funding for the nation’s most popular federal program, to an extent well beyond what otherwise would have been attainable.  But that side benefit was only temporary.  Today, instead, the program is depleting its trust fund – and therein lies the political-economy problem.

That depletion of the trust fund is the broadest point at issue in the interpretation of the new Trustees’ reports – explicitly in the case of Social Security, and implicitly in the case of Medicare.  (I’ll talk more about Medicare in a future post.)  The most-optimistic elected policymakers say that Social Security can continue paying its full promised benefits until 2033 (unchanged from last year’s report) by using the balance in the trust fund.   Others deny the ability of the trust fund to finance current benefits.

For those just tuning in, here is why I believe that the trust fund cannot finance current benefits:  Consider that, as has been the case since 2010 and is expected to remain so until the program is refinanced, Social Security’s tax revenues fall short of its benefit payments.  The balance of the money needed to pay benefits must come from the trust fund (either through its interest earnings alone – until 2021 – or through both interest and redemption of principal – in 2021 and thereafter).  But the trust fund can obtain cash only by trading its special certificates in at the Treasury; and the Treasury in turn can obtain cash only by selling marketable securities to the public.  So non-revenue-funded Social Security benefits, like all non-revenue-funded federal outlays, are financed by borrowing from the public (see the following chart).  We worry about the large federal deficit because we worry about the consequences of large amounts of borrowing from the public.  Social Security benefits, at the margin, must be borrowed from the public, and so have that same consequence as other federal spending – trust fund or no.

Trust fund boosters will protest that the Treasury special certificates in the trust fund are backed by the full faith and credit of the United States of America.  That is absolutely correct.  Next question:  What is the full faith and credit of the United States of America worth?  Short answer:  The ability of the Treasury to borrow from the public.  In words that I remember from a concert monologue by the late, great soul singer Lou Rawls:  It all come down to the same thing, now, don’t it?

However valid it may be, pressing this economic argument is destined to get us nowhere.  The world is divided into Big-Endians and Little-Endians, and neither side will convert the other.  If we are going to make progress, we trust-fund skeptics must speak to the trust-fund advocates in their own terms.  Using the numbers from the latest Trustees’ report, here is one try:

According to the Trustees’ report, as mentioned above, Social Security can pay its promised benefits until 2033.  So when, then, do we want to address the problem?  2032?  Well, no.  It turns out that for all of the 20 years between now and then, Social Security’s trust fund balance is falling like a rock, as is visually evident from the following chart.  In the one year of 2033, Social Security’s deficit will equal roughly 3-1/4 percent of taxable payroll, or about 2 percent of GDP.  Keeping the trust fund above water (which would be required by law if Social Security were to pay full benefits) by first acting in that one year would require a combination of tax increases and benefits cuts in that amount.  Such a one-year economic hit would be a seismic event (a fair characterization might be 7.0 on the Richter scale).  As a percentage of the GDP, this is roughly the size of the hit that the economy is taking now as a result of the automatic budget changes that occurred at the beginning of this year.  In the interests of economic stability, a fix to the program should start earlier, and phase up to that accumulated savings and annual amount by 2033.

(Some advocates of Social Security [I consider myself one, but I would not hold this view], and of its trust fund, would say that the program should continue to pay full promised benefits out of general revenues even after the trust fund is exhausted.  To which I would respond:  You can’t have it both ways.  Don’t say now that Social Security can continue to pay benefits because of its trust fund, and later, after the trust fund is dissipated, that the trust fund is irrelevant.  If Social Security’s ability to pay benefits really is constrained by the strength of the general fund, then open your eyes to the consequences of Social Security for the strength of the general fund today.)

But to mix metaphors just a bit, planning to take the trust fund down to precisely a zero balance and stop instantaneously there would be very much like planning to pull your aircraft out of its steepest dive at precisely zero altitude.  I hate to speak any ill of my very good friends in the Social Security Office of the Actuary – the “Baltimore Oracles,” as I sometimes have addressed them in private conversation – but their projections for 20 years from now might be off by just a little bit.  That is why the most ardent advocates of the trust fund concept have always called for a minimum prudential balance in the fund equal to about 100 percent of annual benefits.  So rather than tolerating a minimum balance of zero, which the trust fund is expected to hit in 2033, trust-fund advocates instead should want to stop the decline at 100 percent of annual benefits.  It turns out that this moves the drop-dead year from 2033 only to 2029 – so precipitous is the decline in the trust-fund balances.  (Over barely 20 years, in fact, the balance will fall all the way from 350 percent of annual benefits to zero.  That dizzying decline in a trust fund would embarrass any conscientious “trustee.”)  But for the same reason explained above, waiting until 2029 to begin the effect of a policy reform would have the same seismic one-year impact on the economy as waiting until 2033.  So again, the changes in policy must begin earlier than 2029, and taper up to the desired annual impact by that year.

But how much earlier than 2029 should we act?  Here is one more consideration:  It has become customary to consider Social Security benefit changes only with 10 years’ notice – so that persons close to retirement have some minimum period of time to consider changing their employment and retirement plans, increasing their savings, and so on, to be sure that they have an adequate stream of income when they eventually do retire.  That suggests that even a policy that begins to take effect in 2029 should be legislated at least by 2019, to provide fair warning to prospective retirees.  And ideally, that policy should be legislated sooner than 2019 – to allow the effects to begin earlier than 2029, and to taper up to the necessary one-year impact by the drop-dead year.

Now consider one more little-discussed factor in the latest Trustees’ report:  It has become customary to discuss and analyze the combined Social Security trust funds – that is, what is know as the Old Age, Survivors, and Disability Insurance (OASDI) Trust Fund.  However, statutorily, the Old Age and Survivors (OASI) fund and the Disability (DI) fund are separate.  The law requires that benefits be paid only to the extent of the balances in a trust fund; once the balances are depleted, benefit payments are allowed legally only to the extent of the income to the fund.  We have never been there (thankfully), but presumably, so that benefits can be paid on a timely basis, they must be reduced across the board so that they equal the amount of incoming tax revenue.

Well, the Disability Insurance trust fund, considered separately as it must be by law, will be exhausted in 2016 – much sooner than the combined OASDI funds, or the OASI fund considered separately.  Therefore, in the absence of legislative action before 2016, Disability Insurance benefits will have to be cut by about 20 percent to keep the trust fund balance from falling below zero.  This benefit reduction must apply to all DI benefits – not just to the benefits of new beneficiaries as they come on the rolls.

DI costs always have been unpredictable – much more so than OASI costs.  Deaths and retirements are, in actuarial terms, pretty much statistically scheduled events.  The onset of disability, plus the workings of the program review and appeals system, are much closer to random.  The difference between the two is like the difference between the life insurance business, which is considered to be quite dull and plain vanilla, and the property and casualty insurance business, which often is quite exciting.  As therefore might be expected, the political system has faced funding emergencies in DI before.  The typical solution in the good old days was to transfer either existing balances or shares of future payroll tax revenues from the OASI trust fund to the DI trust fund.  There was always a reservoir of bipartisan cooperation sufficient to spare both sides from the political angst of trying to solve the actual underlying funding problem under severe time pressure.

Surprise:  The reservoir of bipartisan cooperation has long since run dry.  The impending exhaustion of the DI fund will be seen by many on Capitol Hill as a handy hostage for purposes of political extortion.  Those who believe that DI beneficiaries are slackers for whom the benefits are an excuse to avoid going back to work will formulate their demands for recapitalizing the trust fund, and will be more than willing to allow the trust fund to hit the deck if their demands are not met.  The result could well be yet another pre-manufactured crisis that is harmful not only for all of the deserving beneficiaries – whatever your opinion as to how numerous they may be – but also for public trust in the Social Security program broadly.

So we would be wise to put Social Security on the policy agenda before 2016, to get ahead of another Perils-of-Pauline crisis with respect to Disability Insurance.  And for that matter, even those with the deepest faith in the trust fund should want to begin to address the Old Age and Survivors program’s future by about that time anyway.  And consider the argument for early action that the Trustees’ report always makes:  The sooner policy is changed, the more generations who can be called upon to contribute to the effort (while still receiving necessary “fair warning,” such as the 10-year guideline cited above), and therefore the more thinly the burden of the transition can be spread.  Fairness dictates that we act sooner than later.  Prudence suggests that we act sooner than later.  Keeping faith with Disability Insurance beneficiaries will demand acting soon.  What value would suggest procrastination instead?

So in a world of dead options, the task is to find the option that is least dead, and pump some life into it.  That is why, several months ago, CED suggested the strategy of “saving Social Security first” [see here for a blog post on this topic, and here for a statement from CED's Trustees] to begin the difficult process of turning the nation’s rising debt burden around.

With the recent release of the revised budget outlook by the Congressional Budget Office (CBO), Washington’s interest in hard choices has waned even further.  The deficit is projected to decline in dollar terms for two more years; the debt will fall as a share of the GDP from 2015 through 2018 – that is, until three elections cycles from now.  The mentality of the body politic is to ignore such a long-term issue.  After all, it might just go away.

So this blog post will put these two factors together.  The budget problem is in remission, but not cured; and that makes the approach of fixing Social Security as a first step even more appropriate.

So point one:  Why should the nation still be concerned about fiscal responsibility, even after CBO reduced its estimates of future deficits?  Here are three simple reasons:

Even in the new and more-optimistic estimates, the debt remains too high, and resumes growing faster than the economy before long.  Even with CBO’s reduced estimate of this year’s deficit, the debt at the end of the year will exceed 75 percent of our GDP.  It is not projected to fall as far as 70 percent, and will be back to more than 73 percent of GDP by 2023.  The European Monetary Union was formed with a ground rule that all member nations should as a minimal condition hold their debt-to-GDP ratios below 60.  The United States has carried debt burdens this large only during and in the immediate aftermath of major wars.

The smart money would say that CBO’s new numbers are more likely to prove optimistic than pessimistic.  CBO projects revenues above the long-term average.  It projects a continuation of a slowdown in healthcare cost growth that experts cannot explain.  The projection – the “baseline” – omits the consequences of likely extensions of tax cuts and postponements of spending cuts that would sharply worsen the already unacceptable outcomes (adding $2.4 trillion to the debt over the next 10 years, and raising the debt-to-GDP ratio in 2023 to 83 percent).  If the economy grows faster than forecast, interest rates will rise sooner and farther for our already excessive stock of debt.  And any prospects of faster growth in the United States must swim against the tide of slow growth overseas.

Excessive debt is a slippery slope.  Debt begets debt service, which begets deficits, which begets more debt – and the cycle continues.  The nation will not know whether it has stepped too far down that slope until it is too late – at which point the damage will be catastrophic.  We should not take such a risk.

But does the new CBO outlook change the picture?  By no means fundamentally; but somewhat.  However little time the nation had to deal with the budget issue, we now have a little more.  That can allow greater deliberation to get it right.  The extra time also is helpful in a weak economy with an especially weak job market.  The horns of the dilemma are that we need to bring our annual deficits down, but we cannot crunch this tentative recovery.  The more-favorable economic outlook gives us a little bit more room to sneak between the horns.

And that is one of the key reasons why starting our budgetary repair by “saving Social Security first” is the least-worst idea in the dead-letter house.  Set the rest of the budget aside.  We aren’t going to deal with all of those issues this year anyway.  Take just this one (big, difficult, crucial) thing and get it done.

The reflex reaction of every political sophisticate will be that rebuilding the finances of Social Security is an impossible task.  That is largely because every political sophisticate has missed the reality that every other approach is impossible, too.  If there were some way to get people to recognize that reality and listen, here are six reasons why we believe that Social Security refinancing is the best place to begin.

Almost everyone understands that Social Security’s finances need to be repaired sooner or later.  By the middle of the 2030s and under the current law, the Social Security trust fund (more on that concept in a moment) will be exhausted, and benefits must be cut by approximately 25 percent across the board.  And that means all benefits – even for the 85 year-old widow in the walkup, cold-water flat; even for the totally disabled former worker.  Some still argue that the balance in the trust fund means that action can be postponed for another 20-some years.  But most people know that procrastination and acting in crisis is not a sign of maturity.  And most informed people also understand that even today, as Social Security draws down its trust-fund balance, the Treasury must borrow more money from the public to pay the Social Security benefits that are due – and the amount of money that the Treasury must borrow from the public, not the amount of the “deficit,” is our real fiscal and financial problem.

As particular budget problems go, the Social Security issue is comparatively predictable, and comparatively well understood.  No step to reduce the deficit is politically easy; someone’s taxes must go up, or someone’s program must go down.  However, technically, Social Security has been analyzed up, down and sideways for many years.  The pros and cons of the possible steps to reduce its payments or increase its receipts are by now widely understood.  Furthermore, although no one knows the future, the coming paths of receipts and benefits are known with greater precision than, certainly, healthcare costs, for one example.  Politics aside, by the technical scale of the coming essential reform of health care, Social Security refinancing would be batting practice.

The budget impact of a Social Security repair can be almost exclusively in the longer run.  Almost all elected policymakers would like to postpone any increases in Social Security taxes and reductions in benefits as long as possible.  Most economists would advise postponing tax increases and spending cuts as long as possible, to avoid crunching our still-tentative economic recovery.  So here is the rare occasion where elected policymakers and economists can link arms and march in step.  The usual rule of thumb is that benefit reductions should not apply to Americans over age 55, because people need some minimum fair warning to adjust their plans for when to retire and how much to save until they do.  The effective dates of Social Security tax increases could be postponed as well – ideally not the 10 years or so of grace that we allow for benefit reductions, but at least some interval – and still contribute their share to stabilizing the system’s finances.  That means that action on Social Security could be taken now, but with little impact on the economy until the recovery has time to take firm root.

Social Security repair would send a strong positive signal to the financial markets.  Even with its fiscal impact postponed for several years, action on Social Security would tell investors in the United States and around the world that elected policymakers in Washington can do their jobs.  It would take a growing slice out of the long-term debt problem, which would be far more constructive than the contrived, inefficient, unsustainable spending sequester.  After real action to deal with the Social Security problem, the markets would cut Washington some slack to deal with the rest of the budget problem (and admittedly health care is far more important than Social Security) on a timetable that would both spare the economic recovery a premature hit and allow the Congress and the President to take their time and do it right.

Social Security repair would send a strong positive signal to today’s workers.  The tale of the poll showing that younger Americans have more faith in space aliens than Social Security is an urban legend.  However, it is likely that few younger workers have unshakeable trust in what policy wonks routinely call America’s most successful and most popular public program.  The typical American worker surely cannot recite the most recent annual Social Security Trustees’ report from memory.  However, the typical American worker viscerally understands that the program cannot keep its current promises.  Refine those promises to a size that the nation can keep, and see what it does to trust in our collective future and trust in government.

Social Security repair, taken by itself, can be politically balanced.  And finally, here is perhaps the most important point:  Some clearly assume that repairing Social Security’s finances net-net would be a concession by Democrats and a political win for Republicans, and therefore that addressing Social Security without including other issues is not politically viable.  But that is not the case.  Think 1982-83, when the “Greenspan Commission” formulated Social Security proposals which, with further refinement by the Congress, earned bipartisan support (and minority bipartisan opposition).  The concessions would have to come from both sides.  Democrats would have to yield the political argument that Social Security does not increase the “deficit” (carefully defined to meaninglessness to make it so).  Republicans almost surely would have to yield the insistence on private individualized investment accounts, and the refusal to raise taxes.  Between those two positions lies plenty of room for a compromise that would be equally painful and equally rewarding for both parties – and good for the country.

So don’t bother looking for a slam dunk.  This is a game among orthopedic surgery patients (at best) facing a 12-foot basket.  No budget proposal yet formulated or still in the ether will garner instant majority support.

But among the bodies at hand, “saving Social Security first” may come the closest to having a pulse.  We would be well advised to get out the paddles and give it a shot, er, shock, and see if we can generate signs of life.

Albert Camus

The Plague

(Stuart Gilbert translation)

The public reaction to the revised baseline budget outlook of the Congressional Budget Office (CBO) has leaned overwhelmingly in one direction:  The deficit and debt problem is in indefinite remission, maybe even cured.  Action on the problem is on hold, if not off the table for good.

Jared Bernstein, former economic adviser to Vice President Joe Biden, was quoted in the first-day reaction story in the Washington Post as saying, “Certainly, if facts drove the day, this update would be a fire hose for the hair-on-fire austerity crowd [regarding] the near-term deficit… The patient is checking out of the hospital while [Republican leaders] are still preparing for major surgery.”

Jared, who is a good guy with deeply held principles (and a very quick wit), would surely say that my opening quotation for this post is way over the top.  But in all honesty, considering the potential consequences of a runaway public debt, I would say that the closing words of The Plague are pretty much in scale.  In fact, I would like to edit Jared’s metaphor:  The patient, a cardiac case with a known arterial blockage, has had his palpitations calmed by medication.  He is out of immediate danger, and has been reclassified from “critical” to “serious.”  His physicians now have the luxury of time.  They can choose a more deliberate approach than seemed essential a few hours ago.  They can even postpone the next step somewhat.  But the blockage is still there, and its consequences are still potentially terminal.  Sooner or later – but not too late – it must be addressed.

To get closer to my specific point, and moving my medical analogy back to The Plague, the plague bacillus is not the annual budget deficit, but rather the accumulated public debt.  It is still far too large; the CBO release has changed that fact hardly at all.  The debt has retreated into the cellars and the bookcases, hidden by today’s very low interest rates.  But interest rates will rise, and when they do, the debt will once again emerge into the streets.  And because we have used this complacent interlude of low interest rates to pile up debt hand over fist, when interest rates do rise, the debt will emerge more virulent than ever.

So that is the big picture, but back to the present:  What did CBO say, and why have people reacted so strongly (yet so blithely)?

CBO’s headline number was its estimate of the deficit for the current fiscal year (2013), which ends on September 30.  Back in February, CBO said that the 2013 deficit would be $845 billion.  Now, they estimate $642 billion – down by almost a quarter in three months.  Five years ago, a $642 billion deficit would have been terrifying.  But now, after four $1 trillion-plus deficits and another near miss, $642 billion feels like a mild early summer’s day at the beach.  People who are not budget specialists probably see that improvement and wonder how much better it will look in another three months.  This nation has climbed out of every jam unscathed; the deficit melted away in the 1990s; surely we will come out smelling like a rose again this time.

But here are the sobering details:  Of the $203 billion improvement in the 2013 deficit, $95 billion comes from a unexpected payment to the Treasury from Fannie Mae and Freddie Mac.  CBO reports that those payments will occur because of “accounting changes,” and assigns a probability of zero to any further payments at anything like that magnitude over the next 10 years.  Another $105 billion (that is, essentially the remainder) of the improvement comes from higher revenues.  Those revenues apparently arose because upper-income households shifted an unexpectedly large portion of their income from calendar year 2013 to calendar year 2012 to head off the increase in upper-bracket tax rates, and because corporate tax payments snapped back to normal from their depressed recession percentage of profits somewhat faster than CBO had anticipated in February.  Neither of those developments will repeat itself to any significant degree, either.

CBO does today see lower deficits in each of the following 10 years than they did in February.  But the margin is not large.  And in most years, the fallout of lower debt service because of the 2013 windfall accounts for as much as one-third of the total improvement.  The revenue surprise of this year trails down to essentially zero six years from now.  There are welcome assumed future savings in Medicare, Medicaid and Social Security.  But just as they had in February, CBO now expects the deficit to improve through only 2015, and then to begin to rise again.  And by 2019, the deficit is again large enough that the public debt grows faster than the economy – that is, the debt-to-GDP ratio begins to rise again.  From a local peak of 76.2 percent of GDP in 2014, it falls modestly to 70.8 percent of GDP in 2018, but then is back up to 73.6 percent of GDP in 2023.

Of course, all of these numbers are forecasts.  And as Nobel Prize-winning physicist Nils Bohr (not Yogi Berra) notably said, forecasting is very difficult, especially if it is about the future.  So we economists and budget-jockeys need to be appropriately humble about our projections.

Still, admitting uncertainty, it is hard to see a lot of upside in these numbers.  Might there be still more revenues?  Sure – but CBO already has raised its projection of revenues as a percent of GDP above their long-term average.  And that is after the income tax rate cuts for the vast majority of the population were made permanent at the beginning of this year, making further revenue improvement less likely.  And outlays could be lower, too; but CBO (as noted above) already has reduced its estimates for Medicare, Medicaid and Social Security.

There is a policy risk as well.  CBO notes that most of the temporary law that threatened lower revenues and higher spending over the past dozen years has been made permanent, and so now is baked into the baseline cake.  Most – but not all.  CBO reports that renewal of expiring tax cuts and postponement of pending triggered spending cuts (including the suspension of the “sequester”) would add $2.4 trillion to the cumulative 10-year deficits, and at the end of 2023 leave the debt at 83 percent of the GDP – the highest debt burden since 1948, just after the nation financed the enormous cost of fighting World War II.

So if we cannot lower the river, what about raising the bridge?  What if we had a larger GDP?  There is no question that if the GDP autonomously raised itself, it would reduce the debt-to-GDP ratio.  But many who seek a larger GDP to solve this problem want to achieve it by cutting taxes or raising spending – which would increase the debt directly.  Getting enough additional GDP growth to come out ahead on net would be a neat trick.  And that is especially true given that faster GDP growth would mean greater demand for credit, which would increase interest rates – increasing thereby the federal government’s debt-service cost, and blunting the benefit of the faster growth.  Sadly, the debt already is so large that growth is not so much of an unalloyed benefit as it used to be.

In short:  Our imprudence in piling up this debt, in failing to pay it down further when we had the opportunity, leaves us on the horns of a terrible dilemma.  We have too much debt; and we cannot choke our weak economy.  This is a monumental challenge for macroeconomic policy.  The CBO report is a break in the palpitations, not the disappearance of the arterial blockage.

A closing thought:  The Washington political environment has become so heated that it is difficult to build a productive dialog.  I myself find that when the one-liners start flying back and forth, I can lose the subtleties and the nuance and the conciliatory, problem-resolving language.  Areas of agreement are ignored because the conflict becomes an end in and of itself.  For example, if I asked Jared Bernstein if he believed that the federal government could go on indefinitely accumulating debt at a rate faster than its GDP grew, as is forecast at the end of the CBO 10-year budget window, I am quite sure that he would say no.  Likewise, if he asked me if I am secure in the current shaky economic recovery, I would say no.  We probably are in fundamental agreement about the nature of the current policy dilemma.  We have a lot of work to do to square this policy circle.  And we need to make our plans now – while the palpitations are gone – because we will have far fewer (if any) good options once the heart monitor starts blaring its warnings again.

We – and others on both sides – need to find areas of agreement so that Washington can get off the dime.  I should invite Jared out for a beer and see if we could get this started.  You there, Jared?

So the nation has addressed its mounting public debt problem by failing to take explicit action, and therefore allowing an automatic “sequester” of spending to take effect.  The sequester is a mindless across-the-board cut, reducing defense and non-defense spending alike, and the highest and the lowest public priorities equally.  And for all of the pain it will cause, it is far insufficient to solve the debt problem.  It is the proverbial basketball player who made up for his lack of size with his lack of speed.

The House and the Senate have passed budget resolutions that are trillions apart, literally and figuratively, and they cannot agree to go to conference to reconcile the two.  The House Speaker says that he has been jilted one too many times, and will not meet with the President privately.  The President has taken groups of Republican Senators out for very nice dinners, and even has picked up the check.  (Personal deficit spending?)  But those Republican Senators say that they cannot cut a deal without their Minority Leader, who so far apparently prefers to eat at home.  And there are no signs of any communication between the dining Republican Senators and their House Majority counterparts.

So in those immortal words reportedly shouted at the tips of innumerable umpires’ noses by the late Earl Weaver, “Are you gonna get any better, or is this it?”  Apparently, Weaver never reached a very positive opinion of the quality of major league umpiring, and there is precious little evidence to inspire much greater confidence in the workings of Washington these days.

On first principles, no one had great fondness for the sequester.  Republicans by and large could not abide the defense cuts, and Democrats felt the same about the domestic cuts.  But Democrats, including the President, concluded that the defense cuts could be used as bargaining leverage, and some even embraced the prospect of the sequester as the only way they could squeeze the Pentagon budget.

But the tables appear to have turned.  Enough Republicans have embraced the defense cuts to move the balance in their caucus; and apparently most if not all Republicans enjoy watching the Democrats squirm at the mechanistic reductions on the domestic side (including small cuts in entitlement programs, which are seldom mentioned but have real consequences).  It is easy to blame the White House’s management for any pain and suffering that eventuates, and if an intolerable problem emerges (like air traffic control or food inspection), the Republican House can easily pass a rifle-shot bill to fix it.  If the Democratic Senate were to refuse to move such a bill along, it would have to accept direct responsibility for the problem.  So while some people have expected the sequester to arouse broad-based opposition, that does not appear imminent, or perhaps even likely.

The true harm of the sequester will come in neglect of slower-appearing, longer-term priorities – investment, if you will.  That will include the maintenance of the effectiveness of government as well as more-frequently-cited purposes such as research, education and infrastructure.  In other words, the sequester will favor (in relative terms, at least) the short term over the long term – an ordering of priorities that some would say has become so widely accepted in this country that no one would notice.

So if the sequester is not going to force action on the budget, what will?  Apparently not the budget deficit itself.  Predictably, reports of improvement in the budget, based largely on the new budget outlook from the Congressional Budget Office (CBO), have cooled the fires of anxiety palpably.

Some of the improvement in the budget has come from the modest economic recovery.  Revenues were way down from the historical trend, and have just begun to turn around; but that is enough to make a significant dent in the deficit.  Outlays were up because of the downturn and the stimulus bill, and they have begun to come back to earth, too.

But a lot of the progress on the outlay side has come from a slowdown in healthcare cost growth.  It would be wonderful if this growth slowdown proved to be permanent.  And many policymakers and analysts wish, hope, or believe that it will be.  Advocates of the Patient Protection and Affordable Care Act of 2010 would like to attribute the cost improvement to the new law.  But it would seem too soon for any meaningful payoff, even if you believe deeply in the new law; the insurance exchanges do not begin functioning until next year, and those provisions that already have taken effect would seem unlikely to reduce costs.  The most enthusiastic fans of our private healthcare delivery system would be gratified if cost pressures had led to meaningful process improvement; but that improvement is as hard to identify as is the potential motivation for providers who still profit from an increased volume of services to deliver less.

The clearest potential cause of the healthcare cost slowdown is the economic slowdown.  A consumer who fears that he or she cannot afford to pay for a physician’s recommended treatment is less likely to seek out that physician in the first place.  This certainly characterized many of the unemployed and underemployed in the recent recession.  It still characterizes many of the elderly population, whose spendable incomes are reduced by the just-above-sea-level interest rates that they earn on their savings.  Even among those elderly who have not yet exhausted their savings, there is great concern that dipping into their savings principal for expenses that exceed their interest earnings will impoverish them in short order.  Thus, it is likely that the cost relief enjoyed by the federal government in Medicare comes at least in part from the reluctance of some of the elderly to seek medical care.  The prospect of any such savings to continue in the long term is slim at best.

The weakness in the case for the effect of the economic slowdown is that the healthcare cost slowdown appears to pre-date the recession, at least somewhat.  A strength in the case for at least some role for the economy is that past economic downturns have had similar effects.

In other words, the statutory prudent man would not bet the farm that the healthcare cost slowdown would bail us out of our long-term budgetary woes.  But don’t bet the farm that Washington policymakers won’t bet the farm.

In the middle 1980s, a similar period of deficit and debt angst, budget wonks (though I don’t believe that term had yet been invented) would cite two closely inter-related behavioral tendencies.  The budget deficit was so large that it made decision-makers conclude that it was insuperable; and many policymakers seemed to take the attitude that, if you could not truly solve the problem, you might just as well ignore it – or worse still, have a party.  Also, like today, any signs of good news were quickly scaled up to eternal salvation by many – especially those whose policy choices happened to be in effect at the time.

Rudolph G. Penner, then CBO Director, echoed deep memories of Mr. John O’Connor (God rest his soul), teacher of my first-year-of-high-school algebra class, who would urge his students who were stunned into inaction by a seemingly impossibly complex equation to “do what you can do” to simplify it.  And as we used the equivalences at hand to simplify the terms step by step, lo and behold, the underlying structure would become clear.  Rudy (who most likely never met Mr. O’Connor, though I am sure they would have gotten along) on at least one occasion testified before a congressional committee that anything they could do to reduce the deficit would thereby reduce the accumulated debt, which would reduce debt-service costs in perpetuity; so he urged them to “do what you can do” even if they could not demonstrably eliminate the entire budget problem in one swell foop.

In fact, the “do what you can do” attitude was important in the 1993 deficit-reduction program of the Clinton Administration.  That program might have garnered better reviews at the time if it could have been demonstrated by itself to eliminate the deficit.  It couldn’t.  It was estimated to take a big chunk out of the deficit, and turn the debt-to-GDP ratio down for a few years, but afterward, both were projected to grow again.  It was a struggle to get the Congress to do even that much heavy lifting.  However, though subsequent economic growth exceeded expectations, interest rates remained lower than forecast because of the expectation of continued fiscal responsibility; and as a result, even before the Congress took any further perceptible action, the budget was already demonstrably (to me, at least; I turned out to be right, and won several six-packs of Sam Adams in bets as a result) on the road to balance.

But that simple “do-what-you-can-do” wisdom has been lost, and today the willingness to sacrifice to ameliorate – even if we cannot eliminate – a serious problem seems to be gone.  And now, as at times in the 1980s, temporary and insufficient improvement in the budget has aroused complacency.  The CBO projects that the deficit will be lower this year than last and will fall in dollar terms through 2015, and will remain low enough that the ratio of the public debt to the GDP will fall through 2018.  That apparently seems to some to be enough reason to declare victory, even though CBO makes clear that it does not anticipate the progress to continue.

So the mounting pain of the sequester will not drive action on the budget, and the debt problem itself is in apparent (but likely temporary) remission.  Then what remains?  Sometime in September (the Bipartisan Policy Center is the best source for projections of this ever-changing deadline), the Treasury will once again confront the debt limit; and at the end of September, the fiscal year will end, and all of the agency appropriations will expire.  Some would call these “action-forcing events;” others might believe “scheduled train wrecks” to be more accurate.

Just what these two deadlines will yield is unknown.  Their effects are not identical.  And the appropriations deadline is different from the sequester, although both affect the day-to-day operations of federal agencies.  The sequester squeezes activity by a small increment (on top of larger cuts imposed in a prior law); but an expiration of appropriations – a “government shutdown” – would choke off activity entirely.

In the mid-1990s, the perception was that the shutdown periods caused serious disruption and brought the public’s ire down on the Congress, which was perceived to have caused them.  (History has been revisited by some in the years since.)  Some argue today that the Congress will not want to fall into the same PR pit, but many House Members insist that they will exact a high price to keep the government open.  Some outside observers have said in recent appropriations showdowns that the House’s rhetoric almost required some period of shutdown to save face and avoid a perception that it had been bluffing all along.  Others would say today that extremist constituencies back home will throw out their conservative Members in favor of even-more-extreme conservatives if all of the bluster is not backed up by action.

In a shutdown, federal government personnel are prohibited by law from going to work to pay the legitimate claims of the government’s small-business contractors, employees, and so on.  But in an instance of the second “action-forcing event” – a hard Treasury collision with the debt limit – the federal government personnel will be on the job, but they will not have the money to pay the small-business contractors and employees – or the federal government’s creditors.  The House has considered legislation to “prioritize” debt service and repayment over other claims, and the advocates of such legislation argue that the dreaded term “default” applies only to failure to service and redeem the debt.  There are passionate differences of opinion over whether “default” would occur only in the failure to redeem a Chinese-government-owned bond, and not in missing a paycheck for a U.S. serviceman or servicewoman in harm’s way.  But more important than the semantic issue is the economic consequence.  Would the financial markets erupt if the Treasury failed to service its debt, but yawn if it failed to pay its other legitimate claimants?  I don’t know.  And I don’t want to know – because if the consequences of the latter instance proved tragic, it would be too late to put the toothpaste back in the tube.  And I suspect that the statutory “prudent man” would agree with me.

What will the Congress and the President do about these two pending “action-forcing events?”  Don’t expect action – certainly not before the Congress’s August recess, at least if the current estimates of when the debt limit actually will bind after the Treasury Secretary’s now-routine “extraordinary measures” are exhausted.  And even then, frankly, no one knows.  A government shutdown on October 1 would not be a surprise; the ultimate consequence would be a further flogging of the “discretionary spending” dead horse, even though there is great doubt that the current ten-year statutory limits on the annual appropriations can be met for even one or two more years.  Far more consequential would be a hard collision with the debt limit, whether one would prefer to call it a “default” or not.  The President has said that after the debacle the last time the Treasury approached the limit in August of 2011, he considers the issue non-negotiable.  At the same time, some in the Congress say that they are willing to drive the nation into non-payment of its non-debt-related-obligations if their policy demands are not met.  Discussion of the endgames on both of these deadlines can go on until September – which in today’s Washington, with its modest standards of prudence, means that it will.

And that is the good news.  A recent more-practical (but still plenty wonkish) paper by two Federal Reserve economists, Christopher J. Erceg and Andrew T. Levin, explains that today’s labor market is not only painful, but also puzzling to policymakers.  It identifies yet another unprecedented challenge that is layered upon all the others to make the path back to Normal, wherever that is (unfortunately not the town that is readily visible on the map of Illinois), even more tortuous.

The Erceg and Levin paper already has gotten plenty of press (for example, see a New York Times reference here), but is worth your attention if you have not seen a close discussion.

Here is the problem, in a nutshell:  In a “normal” economy, adults tend to work or to look for work – “labor force participation” in the technical jargon – in quite stable patterns.  Younger people go to school or to work, older people work or retire, and women work or bear and raise children, in relatively predictable proportions.  There are long-term trends in each of these decisions, but they move fairly slowly.  And though this behavior changes in economic downturns, it does not change very much.

The last six years, however, have been distinctly non-normal.  Starting in late 2007, the economy endured a much-oversized recession.  Into 2009, Erceg and Levin estimate that labor force participation was pretty much on the track that would be predicted on the basis of history.  But in 2009, participation began to drop below a reasonably predicted path.  And tellingly, participation dropped the most where the recession – by then, by far the worst in post-World War II U.S. history – hit the hardest.  If there had been some general shift in attitudes, perhaps driven by national policy, one would have expected the change to have been uniform from sea to shining sea.  It wasn’t.  The poster children were Arizona, California, Florida and Nevada.  Think real-estate meltdown, and you’ll get the idea.

And even further from normal, as the economy has recovered in the tentative way that we have seen so far, the unemployment rate has come back – down about halfway from its peak to where it was when the recession began – but the labor force participation rate has not.  It remains virtually at its trough.  In other words, the people who left the workforce have not rejoined (all of this on average and with flows both ways, of course); rather, some of the people who lost their jobs but kept on looking for work have found it.

Based on that finding, Erceg and Levin pose the problem – and coming from the staff of the Federal Reserve, it is appropriately centered on monetary policy:  The Fed normally makes its decisions with one eye on the unemployment rate.  But in this abnormal time, will the unemployment rate be a predictable and accurate indicator of the state of the labor market?

The Fed’s mission is to achieve maximum employment consistent with low and stable inflation.  With about two-thirds of the cost of production in the United States being the cost of labor, price stability requires maintaining wage increases relatively close to the rate of growth of productivity.  (In recent years, wages have lagged productivity – probably because demand has been so weak, and joblessness so great.)  We all understand that wages follow the tightness in the labor market; when available workers are relatively few, employers must bid higher wages to get the workers they need.

The Fed’s program at this point is to maintain its stimulative posture at least until the unemployment rate falls to 6.5 percent (in other words, by one more percentage point), provided that inflation remains controlled.  But might the large reserve of former workers who have left the labor force decide to re-enter after the unemployment rate has fallen enough to prompt the Fed to tighten?  Could the 6.5 percent unemployment rate prove to be a “false floor” on the zone where Fed policy should be stimulative?  Tightening too soon would at least sacrifice potential non-inflationary economic growth, and could even bring back recession.  But holding the accelerator to the floor too long would risk a costly and persistent bout with inflation.

This situation is perilous precisely because the economy is off of the historical charts.  Erceg and Levin provide estimates of potential outcomes, but they are appropriately modest about their precision.

A potentially highly useful part of Erceg and Levin’s paper is an exploration of subgroups of the potential workforce by age, to see to the extent possible who has chosen to leave the workforce, and therefore potentially how likely they would be to re-enter.  What they find is that a significant share of the workforce withdrawals has come from younger workers, many of whom apparently have scanned a forbidding job market and determined that they might as well stay in school.  Interestingly enough, the oldest workers (65 and over) appear to have stayed in the job market beyond expectations.  Their choices seem to follow the anecdote that some older persons lost so much of the value of their portfolios and the equity in their homes that they could not afford to retire.  Such current older workers might be expected to leave the labor force once they see their way clear to a reasonable retirement.  The most questionable group is the so-called “prime-aged” workers (25 to 54, and 55 to 64 years old), who have withdrawn from the workforce in greater-than-anticipated numbers.  Of those, some in the 25 to 54 year-old group have re-entered school; a significant number from 55 to 64 years old have claimed disability coverage under Social Security.  The former are of course likely to re-enter the labor force when times are better, perhaps to earn a return on their investments in schooling; the latter are highly unlikely to rejoin the work force.

So if you buy the Erceg and Levin reasoning and modeling, you would counsel the Federal Reserve to maintain a stimulative posture for longer than the usual unemployment-rate indicator would suggest.  The reason would be that at some point, the discouraged workers are likely to begin to rejoin the labor force and search for work.  Those job seekers will reduce the upward pressure on wages, and facilitate further economic growth with less-than-predicted risk of inflation.  But this is a dangerous game; it is as though you were informed while driving down a superhighway that your speedometer overstates your speed – but by an unknown margin.  You may press harder on the accelerator, but you do so at increasing peril.

I can add one potentially relevant piece of data to the Erceg and Levin story – which was presented in a chart in an earlier blog and in a different context.  As noted earlier, Erceg and Levin found that withdrawals from the labor force occurred disproportionately in states that were hit hardest by the housing bust.  It turns out that the drop in employment in the segments of the construction industry (residential building and land subdivision) most directly related to housing were enormous.  Jobs in residential building fell by almost 45 percent from their level of early 2006 (which admittedly was probably beyond the sustainable); jobs in land subdivision dropped by a staggering 55 percent.  Neither category has seen much of a recovery thus far.  (See chart below.)

We economists speak blithely about displaced workers migrating instantaneously and costlessly into their next-best uses.  But such migration is never instantaneous or costless, and sometimes it isn’t possible at all.  And it can be especially out-of-bounds for home-building workers.  First, the people who drive Erceg and Levin’s numbers live in the hardest-hit parts of the country – where the home-building crunch was so strong that it affected the rest of the economy to the greatest degree.  That means that even if those construction workers have the aptitude to become, say, computer network engineers, they live where the number of such jobs is likely to be the least.  And by definition, because they come from down housing markets, they are the most likely to be underwater on their mortgages and to have the hardest times selling their homes if they should be willing and able to move on every other score.

In other words, we might find that the resolution of the Erceg and Levin conundrum will have to wait on a housing recovery.  And with apologies to Tip O’Neill and his descendents, all housing is local.  We have had regional economic phenomena before – oil booms and oil gluts, bi-coastal economies (up and down), worldwide food-price fluctuations, and everything else.  But this downturn has been the biggest, wildest ride in my lifetime, at least, and it is likely to remain so for some time.  There will be local and regional disparities in the economy – which pose their own problems for national policymaking.

So thanks to Erceg and Levin for a clearer picture of a dauntingly bad scene.  And to my friends on the Federal Open Market Committee:  You’ve earned your combat pay, at least for this quarter.

The most off-base chatter is the suggestion that a retiring Chairman Baucus will pursue different policy than would a campaigning Chairman Baucus.  Such talk is a branch office of the chatter in late 2008, late 2010 and late 2012 that a monumental budget deal would emerge from those “lame-duck” sessions of Congress.  The thinking (to be kind) was that departing Members of Congress, at last freed from the tyranny of their constituents, finally could vote their true convictions and would turn a policy 180 to make the tough choices.

What we learned, instead, was that those free-at-last Members of Congress actually had been voting their convictions all along, and had no reason or inclination to change their stripes in the dying days of their final Congresses.

Chairman Baucus fits that mold.  What he has done has been to represent his constituents, as he understood their views to be.  (One can of course argue the dichotomy between representing, on the one hand, and educating and leading, on the other hand.)  It turns out that Montana is different from what many metro-centric pundits live and breathe.  I would like to think that economics and policy science are geography-neutral, but I fear that they really are geography-ignorant.  My eyes were opened by a private conversation with a Washington reporter newly transplanted from upstate, rural New York, who related that the really good jobs in her home town were carrying the mail – because they provided the employee benefits (especially good health insurance) that we in Washington consider to be a prerequisite of even a near-poverty standard of living, plus a pay scale that is set nationally and approximates more closely compensation in urban areas.

So people in Montana do not see the issues of the day in precisely the same light that we “dazzling urbanites” do.  Chairman Baucus has reflected the perspective of Montanans in Washington.  He likely will continue to do so until he heads back home.

There is plenty of speculation over whether the Senate majority will see major action on tax reform (and health reform, also primarily under the jurisdiction of the Finance Committee) as helpful or harmful to their 2014 electoral prospects.  Politicos further wonder how Senator Ron Wyden, who in 2015 will be the senior Democrat on Finance (Senator Jay Rockefeller (D-WV), now senior to Senator Wyden, has announced that he also will retire next year), will weigh his probable hopes to become Chairman (if the Democrats maintain their majority) against his willingness to take risks.  Recall that Senator Wyden has designed adventurous reform packages in collaboration with Republicans (former Senator Judd Gregg (R-NH) on taxes, former Senator Bob Bennett (R-UT) and current House Budget Committee Chairman Paul Ryan (R-WI) on health care).  He will need to consider how any positions that he takes in these two years will affect his standing with the Democratic Senate leadership.

But all of that amounts to a matrix of suppositions at this point.  About the only thing that we do know is that Chairman Baucus will have more time on his hands, given that he is not running for re-election.  Frequent trips back home would eat up a lot of his time, given that he has among the worst commutes of all Members of Congress (even worse than mine, by at least a little).  His retirement decisions will free him from some of that.

Still, all of this is mostly window dressing.  Chairman Baucus has an important position, but to accomplish anything he must have the support of a majority in the Finance Committee, plus the cooperation of the Senate Democratic leadership to get any bill to the floor.  And then, under the most likely scenarios, he will need 60 votes on the floor (although it is conceivable that he could have a reconciliation instruction from a budget resolution, which could allow passage with 50 votes plus the Vice President), plus a majority in the House.  And that final product must be acceptable to the President, as well.  The fundamentals are daunting, and whether Chairman Baucus’s retirement will facilitate or prevent major budget action is anyone’s guess.

But earlier this month, three faculty members of the University of Massachusetts-Amherst (Thomas Herndon, Michael Ash and Robert Pollin, hereinafter stuck with the moniker of “HAP”), working in part with a data spreadsheet provided to them by Reinhart and Rogoff, discovered errors in the original calculations.

Given the prominence of Reinhart and Rogoff personally and of their findings in the budget debate, what should we conclude?  How, if at all, should our thinking change?

Without burrowing deep into the weeds, but for your background:  HAP found two families of what they consider to be errors.  First, there were mistakes in spreadsheet formulas, which had the effect of omitting some relevant data from crucial calculations.  On that count, RR plead guilty as charged.  Second, there are some complex questions with respect to the relative weight in the calculations that should be assigned to different high-debt episodes in different countries.  This one is a judgment call.  However, given the discovery of the other errors, it looks like RR will need to mount a full defense on this count as well.  And in practical terms, HAP present competing findings with this second “error” corrected; those findings have received and will continue to get attention.  (In addition, there were some few errors in data entry, but those apparently are not consequential in terms of the results.)

Correcting those errors, it turns out, significantly attenuates RR’s finding that debt is an important determinant of growth.  The HAP paper potentially could change the tone of the budget debate.  However, I personally would conclude that it should not change the substance.  Why?

In my judgment, RR put far too much weight in their original presentations on a curiosity of their findings.  Specifically, they found that countries that had public debt in excess of 90 percent of GDP had sharply less economic growth than those below that level.  They went to great length to reason why that 90 percent level had such particular significance.  Their discussion, and the public reactions to it, have identified this research closely with the notion of a “magic number.”  Many advocates of the RR position specifically referenced the 90 percent figure.  Do an Internet search for Reinhart and Rogoff, and even if you then insist that the entry include the number 90, you still will get a boatload of references dated before the release of the HAP paper.

All of this seems like false precision – especially given the inevitable imprecisions and conceptual inconsistencies in their monumental multi-country, multi-era data set.  (As one case in point, typical knowledgeable economists break out in hives when they recall that RR use gross debt – for example, in the U.S. case, counting the holdings of the Social Security, highway, and other trust funds.)  RR’s real achievement, which is far less spectacular than the 90 percent boundary, is to document excessive public debt’s cost in terms of economic growth – which should be obvious enough intuitively, but remains easy for some to ignore or even deny.

HAP, for all of the sturm und drang surrounding the release of their paper, have not changed anything that matters.  What HAP have done, really, is to discredit the false precision of the magic 90 percent threshold while leaving the key general point standing.  To get a sense of this, consider the following table, derived from figures 1 and 2 in the HAP paper:

(N.R. indicates not reported.  Note that HAP presented a finer gradation of the debt-to-GDP ratio to explore the relationship in more detail.)

The conclusion I would draw from this table, accepting all of HAP’s criticisms of the RR data and methodology, is that higher debt and lower growth are at least closely associated.  (HAP report that a statistical test fails to reject their null hypothesis that these average growth rates across debt-to-GDP ratio classes are statistically the same.  However, beyond the internationally recognized are-you-going-to-believe-what-I-tell-you-or-your-own-two-eyes test, my limited experience with practical statistics suggests that one could reverse the null hypothesis and a statistical test would fail to disprove that the growth rates are different.)

HAP do deserve real credit.  The 90 percent figure could have become an excessive deterrent to necessary action in extremis – almost like the old shibboleth that if man flew faster than the speed of sound, his ears would fall off.  There may be times when policymakers must grit their teeth and go to a forbidding place, to prevent an even worse outcome.  But that having been said, and beyond eyeballing the RR data with the HAP corrections, we can apply some common sense.  Ask yourself the simple question:  Why would I be happier if my nation carried a smaller rather than a larger debt burden?  I can think of four easy answers:

•  I’d rather spend my scarce tax dollars on something other than debt service.  A former boss of mine, the former Rep. John M. Spratt (D-SC), used to say that if you wanted to destroy popular esteem for government, the easiest way would be to run up an outsized debt burden.  People often complain that they pay substantial amounts of taxes, but they don’t receive anything in return.  Putting aside that people in their daily lives tend not to think about national defense, law enforcement, food inspection, roads, air traffic control, etc., etc., to the extent that their taxes go to pay the federal government’s debt service, people’s reflex criticism is correct:  They don’t get anything back for the taxes they pay.

•  I want flexibility to respond to problems like the financial crisis.  Suppose that back in 2007-2008 the public debt already had been at the roughly 75 percent of GDP that we “enjoy” today – or an even higher burden.  Or suppose that the nation in such circumstances were hit by another major natural disaster.  Would you want to find yourself in a dilemma where you could not revive the economy or help your neighbors because the nation had no credibility in the credit markets?  Joseph Heller was right:  Catch-22 can be a hopeless situation.

•  I don’t like to worry about a financial meltdown.  If you had trouble sleeping during 2007-2009, enough said.

•  There is a relationship – not a cliff, but a meaningful slope – between debt and growth.  This reason is associated with the first one above.  An extra dollar of debt service means one fewer dollar for investment in infrastructure, human capital, or scientific and technical knowledge; or one greater dollar of tax burden, which distorts economic incentives and the allocation of resources; or some amount of additional debt service next year (repeat ad infinitum).  (Some will counter that the nation could cut wasteful government spending instead of true public investment.  But once you have cut all the way down to the government you want – and by the way, lots of luck trying to get a majority of the rest of the country to agree to precisely the government you want – the point remains the same.  Debt service then will continue to crowd out things you want government to do.)

There are all sorts of qualifications to the RR analysis.  An important one is the ambiguous direction of causation.  There is plenty of reason to fear that higher debt causes slower growth.  But slower growth for some totally separate reason certainly would reduce revenues and increase spending, causing larger deficits and debt.  Still, this is just one more reason to control debt in the first place – to avoid a debt crisis should bad news strike.  Again, Catch-22 is real, and a real potential problem, and fiscal prudence can avoid it.

Another conceptual issue is the timing of the relationship between debt and growth.  A nation with a still-moderate debt that is nonetheless setting off alarm bells (think Spain five years ago) could be hit by financial problems and forced to impose contractionary budget measures, and therefore might take a growth hit.  Later, while debt is elevated, the economy might turn around and register very rapid growth in a recovery.  Thus, a true causal relationship of high debt leading to slow growth still could populate the RR data set with years of comparatively low debt and slow growth, and other years of elevated debt and very rapid growth.  Quantitative analysis of this sort always is perilous and difficult.

But all of that said, we can be confident following our common sense.  All else equal, there is every reason – including, but not limited to, the prospects for economic growth – to seek lower debt.  Of course, all else is never precisely equal.  His one colossal economic misjudgment aside, the late President Lyndon B. Johnson showed sound instincts when he said that you can’t save the chicken farm by starving the chickens.  The middle of a down economy is not the right time to squeeze the budget, any more than the morning after a heart attack is the right time to climb on the rowing machine.

But in fact, in an amicable and I think constructive one-on-one that I just had with Robert Pollin, the “P” of HAP (available here), he readily agreed to the broad, common-sense point about debt (though we disagreed significantly on some other issues).  It is easy to argue over the precise shape of the relationship between debt and growth, but it is just as easy to agree with the fundamental point that debt matters – on the down side.  You can safely follow your instincts – regardless of the graphic headlines you might have seen in recent days.

In contrast, only the true tennis buff – of a certain age – has heard of Ray Ruffels.  Ruffels, another Australian, born in 1946, evolved into a doubles specialist, notably mixed doubles.  In 1978, when Billie Jean King had just about reached the zenith of her remarkable career and sought a 20^th Wimbledon championship to surpass the lifetime record of 19 long held by Elizabeth Ryan, she chose Ray Ruffels as her mixed-doubles partner to do it.

Ironically in the nascent Australian tennis madness of the late 1950s and early 1960s, there were few quality public courts.  Serious players had to build their own behind their homes.  Rosewall and Ruffels were good friends, and often would visit each other’s homes to practice and play.  The story goes that in these private matches, Ken Rosewall never beat Ray Ruffels.  But in major tournament play, and despite being 12 years younger, Ray Ruffels very rarely beat Ken Rosewall.  Somehow, when the cameras were focused and the money was on the table, Ken Rosewall always could find the steel in his spine to withstand the pressure.  Ray Ruffels couldn’t.

Graceful transition to tax policy:  As they declared in their April 8 opinion column in the Wall Street Journal, House Ways & Means Committee Chairman Dave Camp (R-MI) and Senate Finance Committee Chairman Max Baucus (D-MT) have begun to collaborate on a tax reform bill.  As required by the Constitution, this bill, if it in fact proceeds into the legislative process, must originate in the House.

And therein lies a cautionary tale.

Chairman Camp’s process appears to be conscientious and fair.  He has invited Ways & Means Democrats to participate.  He has created bipartisan working groups to map out various aspects of tax policy – including effects on particular industries or on investment in general, retirement, education finance, and so on.  (I was privileged to be invited to speak to one of the working groups in an informal session earlier this week.)

Still, given their differences, the two parties have an enormous mountain to climb to achieve agreement.  Various observers have pointed out that the word “revenue” does not appear in the Baucus-Camp op-ed column.  Thus, a fundamental question about broad tax legislation today – should it contribute new and additional revenues to achieve deficit reduction, or should it be “revenue-neutral” – has not yet been resolved.  And though the two Chairmen agree that a new tax code should be as progressive in its distribution of the burden as the current one, that can be a difficult standard to apply or even to measure when the new system is changed fundamentally.

But in the spirit and intellectual rigor of the discipline of economics, let’s assume that the House Ways & Means Committee can agree internally and privately on a bill.  It is time to go public and take the bill to the floor for a vote.  If that bill meets the standard of “comprehensive” reform enunciated by the two Chairmen, it will eliminate many preferential provisions in the current law – in order to close special-interest loopholes, and pull in large corporations that pay zero tax, to cite two of the failings of the current law that the Chairmen identify in their Wall Street Journal column.  Clearly, the interests that benefit from such provisions do not see them as illicit.  They used their influence and their persuasiveness to make the case that such incentives were (and they will argue, still are) needed to make the nation productive and competitive in the world economy.  Those firms and individuals will not go down without a fight, and they by definition had the political moxie to get their provisions in the law in the first place.

Suppose that you are a Member of the House, and you have heard from strong interests far and wide that would prefer to keep the tax code pretty much the way it is.  And some of those interests might well speak for special tax provisions – the home mortgage interest deduction, the charitable contributions deduction for your local hospital and houses of worship – that your own rank-and-file constituents believe are in their personal interest.  Still, you are convinced in your heart of hearts that the fundamental change before you is in the long-run best interest of the nation.  Are you willing to put your House seat on the line to vote those convictions?

An old friend from the policy wars pointed out recently that there will be a strong subtext to those first public votes on a tax reform bill.  Is the vote before you the real thing – the major tournament, with the money on the table – or is it just a backyard exercise?  After you take on every powerful interest that is dead set against the legislation, will there be any chance that the bill actually will become law?

In other words, can the House – controlled by one party – trust the Senate – controlled by the other party, and of a very different mind on many issues – to take up the bill for which you have put your political life on the line?

A bit of history:  In 1993, the Clinton Administration pressed the large Democratic Majority in the House to pass a major deficit-reduction package.  Inevitably, that bill gored any number of powerful oxen, and the House Democrats were understandably nervous.  Many voted against the bill – in fact, so many that it appeared likely to be defeated.  At the last moment, two Democrats changed their votes, and the bill passed by the narrowest possible margin (two votes, with an even number of Members voting – so that if one vote changed back, the count would have been a tie, and the bill would have been defeated).  Notably, one of those Members who changed her vote was Marjorie Margolies (then known as Marjorie Margolies-Mezvinsky), who had explicitly promised the constituents of her relatively conservative suburban Philadelphia district that she would vote against the bill.  Republicans derisively chanted “Goodbye, Marjorie!  Goodbye, Marjorie!” and waved at her on the House floor after she changed her vote.

Of all of the sensitive provisions in that 1993 bill, the one that raised the most hackles was a fuel tax that was calculated on the basis of the energy content – the number of BTUs, or British Thermal Units – of the fuel consumed.  That proposal was of course the brainchild of then-Vice President Al Gore.  Voting for the BTU tax in the House was perceived to be an act of considerable courage (regardless of one’s view on the merits).

But it also turned out to be an act of futility.  The Senate was so disenchanted with the BTU tax – whether because of politics or substance is impossible to say – that it did not include the provision in its bill.  Instead, it substituted a much smaller increase in the existing gasoline tax.  The Senate then proceeded to pass the bill so modified, again by the smallest possible margin (a tie, broken by Vice President Gore’s vote), and the deficit reduction program became law.

But not without sinking the re-election campaigns of dozens of House and Senate Democrats, giving control of the Congress to the Republicans in the sea-change election of 1994.

So the naïve among you might believe that the acronym “BTU” stands for a modified noun.  But the worldly in Washington are better informed, and know that “BTU” is in fact a verb.  A House Member is “BTU’d” if he or she takes a painful vote for a provision or a bill that then never actually comes to a vote in the Senate.  That House Member therefore suffers all of the pain from an act of courage, but for no real-world reward.  (Some day, I’ll explain to you what it means to be “Guarini’d.”)

So if Chairman Camp is successful in his monumental task of formulating a fundamental tax reform in his Committee, and takes that bill to a public vote on the House floor, the ghost of the BTU tax will be lurking in the shadows.  All of the House Members who are asked to cross all of those powerful interests – and even the preconceptions of many of their rank-and-file constituents – will wonder in the backs of their minds whether a very differently oriented Senate will even consider the potential fruits of their courageous vote.  Will they be BTU’d?  Will it be worth the risk?  Is this vote the real thing, with the money on the table, or is it just a backyard exercise?

Postscript:  In 1978, Billie Jean King and Ray Ruffels made it to the Wimbledon mixed-doubles final.  But they lost that match, 6-2, 6-2.  Somehow, they just didn’t have it when they needed it.  (Ms. King was suffering from a heel spur during that tournament.)  Billie Jean King finally won her record 20^th Wimbledon title the next year, playing in the women’s doubles with Martina Navratilova – taking the final one day after Elizabeth Ryan collapsed and died at the tournament.

There was a throwaway comment in the early press that “the President’s budget has virtually no chance of being adopted.”  Well, no President’s budget ever is adopted; the Congress always makes changes (if it adopts meaningful budget legislation at all).  A much more important test today is whether the President’s budget moves the current fiscal stalemate off of dead center (with the accent on the “dead”).

We will have a deeper account of the prospects for the politics and policymaking of the budget season next week.  But the big-picture takeaway from the release of the budget is that this is the biggest and best opportunity to move the ball that anyone in Washington could have had a right to expect.  It’s time, guys.

Is this the perfect budget?  No.  Could it be the total solution to our fiscal problems?  No again.  It has its downs, as well as its ups.  But in its entirety and in context, it is at least enough to justify a pizza, a few beers, and a serious conversation.

Let’s start with the ups.  Here is the bottom line – the size of the nation’s accumulated debt as a percentage of the GDP, under this year’s budget in comparison with last year’s:

To a budget geek, these two lines represent roughly the difference between night and day.  Last year’s budget left the debt – already in danger, far too high – at a constant share of the economy.  That is the equivalent of walking along a precipice with three toes and one heel hanging over the edge.  This year’s budget has the debt shrinking consistently – like walking away from the fatal drop.  Fast and far enough?  Certain, in a shaky economy?  Arguably neither, but equally arguably in the ball park.

Interestingly, there has been little or no challenge of the President’s numbers as being the product of “phony savings.”  There has been mention that the routine Congressional Budget Office (CBO) re-pricing of the budget is expected to show smaller savings.  But the CBO re-estimates always show smaller savings than any President’s budget, so that is not news.  (Footnote: You may have read allegations that the President has booked “phony savings” from ending the wars in Iraq and Afghanistan, which has been expected for years.  But the President’s accounting approach also increases in equal measure the baseline – the outcome that is assumed without the President’s policies – and so does not at all affect the bottom line.)

A second up is that the President has made tangible gestures to the other side.  Given that any solution must be bipartisan, it might be a good idea to get the two sides together.  In this respect, the President puts both Social Security and Medicare policy on the table, including the adoption of the so-called “chained CPI” (for inflation indexation of all indexed federal programs, including but not limited to Social Security).  In recent months, both House Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY) have cited the chained CPI as the key to a budget compromise (see here), so one might say that the President has offered not an olive branch, but rather the whole tree.

OK – So what are the downs in the President’s budget?  Well, he did not propose a comprehensive market-based reform of Medicare (or Medicaid).  CED has been clear about our preference for a system of incentive-based beneficiary choice among competing plans.  Still, that seems to be a point of difference that is worth discussing, rather than a reason to refuse to discuss.

But the key sticking point is that the President demands some new revenues as a part of a deal, whereas congressional Republicans insist that revenue talk is over.  Both sides have a story.  Republicans say that the President got his revenue in the “fiscal cliff” deal – the American Taxpayer Relief Act (ATRA) – at the turn of the year.  The President points out that ATRA increased revenues by $600 billion over 10 years, and that Speaker Boehner, in their nearly successful negotiations back in 2011, offered $800 billion – suggesting that there should be more room to go.

Everyone has the right to pick a side in this difference of opinion.  But there is one indisputable fact:  Neither side can solve this problem all its own way until at least 2015 (assuming Democrats hold the Senate and take the House in the 2014 elections) or 2017 (assuming Republicans take the White House and the Senate and hold the House in 2016).  Many economists would argue that the impact of actual deficit reduction should be postponed to protect the economic recovery in the near term.  But even so, it arguably would be risky to delay putting longer-term deficit-reduction policies into place until 2015.  It almost certainly would be dangerous to procrastinate until 2017.  Having policymakers holding their breath until they turn blue or get exactly what they want, whichever occurs first, is not a prudent course of action with the welfare of the Republic at stake.

In sum, and to capitulate to the inevitable football analogy (can’t come up with a baseball simile), the President’s budget is as close as Washington ever will come to an offer of a combined huddle while the two cheerleading squads perform jointly in the center of the field.  If this is not enough to get a serious conversation going, I am not sure for what cosmic event we are waiting.