Two troubling stories hit print this week. They are troubling because they bode ill for the prospect of meaningful Medicare reform, and therefore for a budget deal.
Image taken from here
The later of the two appeared in this morning’s Washington Post. It uses poll results to show that voters in key swing states — Florida, Ohio, and Virginia — strongly oppose the premium-support Medicare model of Governor Mitt Romney and Representative Paul Ryan. At least 70 percent of seniors responded to the poll that they want to retain Medicare as a system of guaranteed benefits, rather than receiving fixed-dollar premiums to choose among alternative plans. In Florida, 65 percent of the entire population favor the current system.
On the question of whom they trust to deal with the Medicare program, respondents favored President Obama by 19 percentage points in Ohio, 15 percentage points in Florida, and 13 percentage points in Virginia. In a different poll, strikingly, respondents in these states who consider Medicare to be an important issue favor President Obama by 59 percent to 36 percent; those who do not consider Medicare to be an important issue favor Governor Romney by 54 percent to 36 percent.
So as you have read as a prediction earlier on this site, and then seen and heard as news in the media, the economic-policy debate in this country has fully migrated from the halls of Congress to the campaign stump. Nothing will be decided about the rapidly mounting debt despite the fast approaching collision with the “fiscal cliff” – a collision that was explicitly scheduled to be an action-forcing event. We are left to consider what will happen after the election to head off the train wreck.
The expected “lame duck” session of the Congress will not be the Promised Land. It will not bring a religious conversion on the part of Senators and Representatives newly freed from the unholy demands of their constituents. However, in the most hopeful scenario, it will have to produce a change of course to avoid the scheduled collision with the fiscal cliff. Here is a brief description of what will be required.
This is an additional, longer-than-usual post, to provide detail on the news of the last few days. We will be back to the usual format later this week.
Former Massachusetts Governor Mitt Romney’s choice of Wisconsin Representative Paul Ryan as his running mate already has proven controversial. But virtually every authority agrees that it will put budget policy front and center in the election campaign.
The nation needs a debate about the budget. Now, apparently we will get one. Whether it will prove to be productive is another question.
This is to give you some background to put the issue and the candidate into perspective.
This week, the end-of-year automatic policy changes that were originally intended to steady the shaky federal budget appeared to rise in public concern. A Wednesday front-page above-the-fold Washington Post article was headlined, “For U.S., economic worries come home / ‘Fiscal cliff’ is replacing European turmoil as top threat to recovery.” The Congress debated (to the extent that its free-form discussion without specific legislation on the table is “debate”) the issue at length.
This sentiment was reinforced by Federal Reserve Board Chair Ben Bernanke’s twice-yearly monetary policy report to the Congress, and his associated testimony before the Senate and House banking committees on Tuesday and Wednesday (see here). Chairman Bernanke wrote in his prepared statement that “I would like to highlight two main sources of risk: The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation… As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.”
This was a busy week in Washington as the budget battles continue in this election year. Some key highlights from the U.S. fiscal scene:
This is a rather long post. It tries to put into a clearer perspective the highly publicized impending end-of-year budget and tax events – called “taxmageddon” by some in the press. It takes the position that as imposing as these legal developments are on paper, a short-sighted Congress and White House could work their way around the consequences – but only in the near term. The budget time bomb continues ticking. What are the fundamental elements needed for a new President and Congress to take this problem on? We close with a few observations.
You surely have heard of the extraordinary budgetary events that lurk in the nation’s tax and spending law, just waiting to spring out upon us at the end of this year. The list is long, and frankly frightening.
In the previous decade, temporary laws involving hundreds of billions, even trillions of dollars became highly fashionable. Then with the financial paroxysm at the turn of the decade, the Congress and the President enacted more temporary legislation to provide near-term stimulus to the economy. The former actions were based on the assumption that robust economic growth would continue forever; the latter assumed that after the recession, the economy would bounce back vigorously. Both of these assumptions have proved wrong. So now, what were once presumed to be routine extensions or expirations of temporary laws have become major policy dilemmas.
Some see the “perfect storm” or “taxmageddon” at the end of this year as a likely occasion to take on the budget problem. This optimistic view holds that when confronted with all of these issues, elected policymakers finally will get religion and solve the problem once and for all.
I am highly skeptical – not that a change of heart should happen, but that it will, given recent patterns of behavior. But there is so much at stake that we need a clear view of the next year or so. Let’s start with an inventory of the dangling issues.
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We had a pretty good job growth number of +227,000 for February. And the consensus seems broadly to be that the economy is back, and employment is on a sustainable upward track.
I’m not part of that consensus. I think (1) very short term: we are on an, at best, fragile path; (2) long term: recovery to acceptable unemployment numbers is going to take a sustained 10 years.
To begin with, that 227,000 jobs increase is welcome but small. This economy needs monthly increases of about 110,000 just to keep pace with an increasing population. So we cut into the “stock” of unemployed only by about 117,000. And we barely cut at all into long-term – greater than 26 weeks – unemployment.
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The politics associated with the upcoming presidential election will surely dominate media coverage and the public’s attention over the next eight months. The Republican Party will finally choose their candidate and the focus of our national debate will shift to which party and which candidate has the best solutions to the nation’s problems and can credibly get these solutions enacted and working properly. With GDP growth under 2.5 percent likely in 2012 and 2013, everyone’s top priority is the economy, but that is where all agreement ends. Appropriately, there will be much discussion on two topics—taxes and government spending—where broad differences exist between the parties. Should taxes be increased or decreased, by how much and for whom? Where should government spending on programs be increased and where should it be cut back? The advocates of each position on such issues will claim that their approach will more quickly boost economic growth, yield higher levels of employment and achieve the “right balance” between the public and private sectors. How should the voting public judge these conflicting claims and positions?
Given the precarious position of our federal government’s finances, voters would be wise to carefully balance any promised short-run gains against the implications for long-term fiscal health and sustainable economic growth for the next decade and beyond. While short-term measures are important, we should insist that they are acceptable only as part of a long range plan that gives adequate attention to our country’s ever-mounting public debt. This can be done only if we genuinely restructure entitlement programs, cut domestic and defense spending and overhaul the tax code to raise revenues while increasing fairness and competitiveness. And yes, because of projected cost growth, we have to re-open the healthcare issue since the recent legislation was more about expanding entitlement than reducing overall medical costs. It is widely recognized that it is not possible to make any one of these changes by itself—it is only politically possible if each party simultaneously both gains and gives up on some of its most cherished programs and positions. There does seem to be nearly universal agreement that something like this must be done at some point, and that much more drastic and painful actions will be required the longer we wait. So, why haven’t we done something about this?
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