StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Symbolic deficit reduction

03 Aug 2010
Posted by Edmund L. Andrews

The deficit battles in Congress are reaching a level of absurdity that makes your head spin.   Every day brings new confirmation that the economic recovery is sputtering.  GDP growth plunged in the 2nd quarter; consumer spending is anemic; the housing market has slumped; private-sector job growth has been well below 100,000 per month since May.  Meanwhile, state and local governments are poised to cut another 300,000 jobs over the next year to deal with their acute budget shortfalls -- that's on top of about 200,000 jobs they have cut already.

Yet here is the Senate, bogged down for more than a month on a bill to provide $26 billion for states -- $10 billion to prevent teacher layoffs and $16 billion for state Medicaid programs.   David Rogers of Politico reports on the latest impass: Senate Majority Leader Harry Reid hastily postponed a cloture vote Monday night because the Congressional Budget Office estimated that the bill wasn't entirely paid for -- tax changes and savings were still about $5 billion short.   It also appears that Reid may acquiesce to Republican pressure for a cap on next year's discretionary spending that would be $20 billion below Obama's budget proposal.

It's bad enough that Republicans -- and it is Republicans -- seem blissfully content to stand by as the economy slumps.  But it's an insult to voters to tout this pseudo-austerity as a blow for fiscal rectitude.   $26 billion amounts to less than 2 percent of this year's projected deficit.  It is barely one-fifth the cost of a one-year extension of the Bush tax cuts, which Republicans want to make permanent without any offsets.

This is wrong on so many levels.  Start with the fact that an enormous array of economists, including Fed chairman Ben Bernanke, say the economy is too weak to end stimulus programs just yet  Indeed, many Fed officials probably wish the government was spending more, because the Fed's own firepower is limited when long-term Treasury rates are already down around 3 percent.   Fed officials are actively mulling new stimulus through monetary policy, but the ideas all seem at the margins.   The WSJ says Fed officials are thinking the "symbolic'' step of re-investing their mortgage-backed securities as they mature.

People can argue about how much Obama's stimulus program has helped, though most economists say it did.  But it's very hard to argue that fiscal belt-tightening is a good idea this year, and it's just plain nuts to argue that cutting $26 billion in aid to the states or $10 billion in supplemental jobless benefits will put us on the path to fiscal rectitude.










Budgets crises are not about money...

Budgets are not about money. They're about civil relationships. Government budgets express the fabric of civil commitments that citizens have made to each other over many decades. Those commitments – public safety, education, good roads, freedom from government over-regulation, and reasonable taxes -- are built into local, state and federal budgets. People organized their families and businesses around these commitments. The very slowness with which they accumulated and were reaffirmed year after year in budget legislation, attested to their firmness and reassured people they could safely organize our lives around them.

When we talk about a budget crisis, it is a crisis not because there is not enough money. It is a crisis because the fabric of our society is being ripped apart, threatening families and businesses. The main responsibility of this commission is to assure voters and investors that the fabric of our society will be preserved. To do this it must to identify a priority or commitment so compelling, that if we can be assured that this commitment will be met, we will be agreeable to adjusting the others and constructing a new framework of civil commitments peacefully and cooperatively.

Bringing U.S. fiscal conditions back into sustainable balance will require adopting a set of Fiscal Rules. Agreement on fiscal rules requires a political consensus, and a consensus requires broad voter belief that their most important civil priorities will be met. Voters understand that major changes are needed. They know the old civil commitment framework is unsustainable. To support and participate quickly and smoothly in building a new one, voters need to know that the principles that will guide how fiscal rules are implemented are ones that put their highest life interests first.

The Fiscal Responsibility Commission needs to establish a set of principles on which to base tough budget choices and reshape our civil commitments. Boiling choices down to their basic, underlying values can help clarify difficult problems and inform decision-making. Expressed as principles, these values are essential for building public support for the choices our country needs to make. Absent chosen principles, decisions will be made on the basis of raw political power. Resources allocated this way rarely unify voters or strengthen the economy.

The principles the commission adopts need to make practical sense to families, businesses and government leaders and be applicable in pragmatic ways across all tax, spending and regulatory policies. With these criteria in mind, the Partnership for America’s Economic Success ( offered the following public-investment principles:

1. Human Capital – To achieve economic growth and fiscal sustainability, government should emphasize strengthening the skills and capacities of America’s workforce.

2. Young Children – In developing human capital, our nation should focus especially on children, from before birth to five years of age, and their families.

3. Evaluation – Return on investment should be a key consideration in public resource allocation decisions.

4. Transparency – Government should enable citizens to understand and participate in the assessment of revenue and spending decisions.

5. Sustainability – State and federal budgets should be viable over the long term.

The commission should consider the proposed Partnership guidelines and amend them as needed, but in no circumstance come forward without a set of budget principles on which it can agree. If the commission fails to issue a unified report, it will confirm the market’s worst fears that Congress is crippled by partisanship and unable to act in advance to prevent a crisis, and a crisis is therefore inevitable.

The Partnership principles are forward looking. They put the life success of the next generation first in budget decision-making. They reflect the strongest values of family strength, quality child care, nutrition, health and education, and the strong involvement of seniors. If this Commission were to adopt these principles, it would provide the U.S. government with a values-based, economically sensible vision for how resources should be allocated.

This set of principles in combination with a disciplined set of revenue and spending targets for the next 10 to 15 years, would provide what investors need. The combination of economically smart principles and disciplined fiscal targets would unify voters, make moral and economic sense, and signal to Congress and the White House that their political decisions need to comply with the fiscal targets and put kids-first.

Putting families and kids first as the Partnership principles do, is not a new idea. It is and has always been a very simple and very clear idea. When the ship is sinking, children and families get on the lifeboats first and the rest of us go to the highest part of the ship and sing “Nearer My God to Thee”.

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