Author: Derek Thompson

The Senate passed a $15 billion jobs bill today with 70 votes. Twelve Republicans voted for the measure, and Democratic Sen. Ben Nelson voted against it. I’m legitimately surprised that some sort of jobs bill passed the Senate so quickly, so Harry Reid gets high marks for speed. As for the bill’s effectiveness, I’m less impressed.

Two weeks ago, I predicted that the jobs bill would follow a familiar storyline:
Republicans obstruct, Democrats dither while the public sours over more
Washington partisanship, and a weak bill struggles toward passage. Turns out
I was wrong on the details and right about the conclusion. Harry Reid
tore apart the Baucus/Grassley $85 billion jobs bill, extracted its
beating heart (the payroll tax hiring credit), threw it to the
Senate floor, and said: Vote on this. Good new is: Republicans didn’t
obstruct; Democrats didn’t dither; the public didn’t have a chance to
sour. Bad news is: if this is the end of 2010 jobs stimulus, it kinda stinks:

By the CBO’s count, $15 billion could create the equivalent of 120,000
and 270,000 full-time jobs for one year. That’s not chump change. But
the country would need 200,000 new jobs created each month for the next seven years
to hit 5 percent unemployment by 2017. We’re not talking about a game
changing policy. Its impact on employment — like the bipartisan
gesture that helped move it to a final vote [pass it]– will be small and likely
without consequence.

_____

Procedural reform coda: Tim Ferholz notes
that eight Republican senators voted to block discussion of the jobs
bill and then voted for it, which supports the argument that the
filibuster is increasingly used as a way to delay legislation rather
than protect the interests of the minority party.

Worried your privacy is under siege now? Hoo boy. Check this out:

An application that lets users point a smart phone at a stranger and immediately learn about them premiered last Tuesday at the Mobile World Congress in Barcelona, Spain. Developed by The Astonishing Tribe (TAT),
a Swedish mobile software and design firm, the prototype software
combines computer vision, cloud computing, facial recognition, social
networking, and augmented reality.

Translation: My phone. Pointed at your face. Pulling your information. Stalking, meet your future?

Here’s how it works. Users opt in to the service and submit a photo to
the computer-vision program, called Recognizr. If I point my phone at
you, Recognizr scans your face, sends a 3-D model signature to a server
which matches the face to a photo in its database, and sends back the
name along with social media links, including your Facebook and Twitter
account. Creeped out yet?

Sure, but I’m hardly alarmed. After all, it would be opt in and I don’t
know anybody who would opt in. On smart phones, I can already access the Twitter feeds
and Facebook profiles of people I know. That means that this app is uniquely designed to learn about strangers within my line of sigh who, in turn, want random strangers to look up their information. Talk about self-selection bias: the early adopting Recognizr family is going to be a cesspool of creeps and oversharers. I’m willing to hear arguments that I’m being a Luddite here,
but this product seems too weird to contemplate.

President Obama’s bipartisan health care summit on Thursday is being described as “political theater of the highest order” and “kabuki.” But it’s really more like a Broadway musical revival. Everybody knows the songs and dances, and we’re only watching to see how the actors make the old material feel new. We know the president’s plan, because he’s released it. We know the Senate Democrats’ bill, because we’ve been living with it for almost six months. We know the Republicans’ position because, economically, it consists of two letters: no.

Still things could get interesting. I have three questions in advance of tomorrow’s bipartisan playtime:
1) Will the medium be the message? The summit begins at 10:00AM and is
scheduled to run for six hours. I don’t see an enormous number of
Americans skipping work to watch at home. That means the event will come down
to moments re-playable on cable and evening news shows. It won’t be
enough for Democrats to say “Didn’t you notice that the GOP just had
this pervasive, obstructionist attitude the whole time?” because that doesn’t come across in a clip. Democrats want to make news tomorrow.

It doesn’t matter that the event is designed to be a conversational
symposium. Its audience will follow it via a TV recap, which means the
highlights will have to fit into the same sound-bite straitjacket as
every other piece of news. Both sides know this, and I suspect they’ll show up
ready to sling one-liners like bullets in High Noon.

2) What will Republicans actually do? Politics, like poker, is best when the players don’t know each others’ hands. The wonderfully bizarre and fascinating thing about this event is that everybody’s hands have been face-up on the table for months. Even liberal writers
are acknowledging that the bipartisan summit is essentially a scheduled
trap designed to ensnare the GOP so that Democrats can point to
specific moments of unfair, hyper-partisan obstructionism. So I’m fascinated to see how Republicans handle the summit. Will they aim for sound bites perfectly manicured for a Fox News audience? Will they aim to be ponderously thoughtful on the issue of, say, tort reform to turn the event into the world’s most boring think tank, and starve the summit of any telegenic energy? More broadly, what lessons did they take from their proper thwacking at the House Republicans Retreat?

3) How will Obama game bipartisanship? I think Clive Crook is right on this: This summit isn’t about persuading Republicans to vote for health care reform. Instead, it’s about persuading Democrats to vote for health care reform. This persuasion could come in various forms: Republicans could make fools of themselves at the event and experience a public backlash; or American viewers could “recognize” that health care reform is a sensible, even moderate, solution.

But what’s the best way for Obama to demonstrate that health care reform is sensible and moderate? Will he purposefully
elide reasonable “conservative” health care reforms in his opening statement, so that he can easily
adopt them later and say, “Look we acted in good faith and took some of
their suggestions”? Or will he open with a litany of compromises
they’ve already made with Republicans — insurance policies across state lines,
high risk pools, etc — to preemptively undercut their argument that the bill is far left?

Here’s why the government stimulus worked: it kept hundreds of thousands of Americans at work, at least. It added percentage points to GDP. It sent billions of dollars to unemployed and low income Americans to prop up private demand as consumption was ready to fall off a cliff.

That’s my take anyway, but not everybody agrees. In fact, if my regular commenters are any indication, quite a lot of people think my interpretation of the stimulus is utter bogus. In the spirit of balance and fairness, I wanted to hear from an academic member of the anti-stimulus team, so I spoke with Don Boudreaux, professor of economics at George Mason University* and a blogger at Cafe Hayek, about the new jobs bill and the theory of Keynesian stimulus. Here’s our chat:

We should probably begin with his explanation for why he thinks
government stimulus doesn’t work the way the Obama administration
hopes. Here’s Boudreaux:

I’m in the camp — it’s in the minority — that argues that stimulus
is not good policy for a couple of reasons. First, money taken to spend on
stimulus projects are taken from elsewhere in the economy. The second thing, the deeper problem, is what’s being stimulated? For the past eight years leading up to the crash,
we had a lot of economic activity that everybody understands was built on
wealth that wasn’t there. People were employed doing things they
shouldn’t have been doing. A lot of it came through the real estate
sector. If the stimulus keeps people in these jobs that they shouldn’t
have been in to begin with, we’re just delaying the day of reckoning. I
want to see the economy adjust to a more sustainable growth path where
people are not artificially propped up by bubbles or by stimulus, which
I worry is is the case now. That said, we can debate giving unemployment assistance.

So the jobs bill: Here’s a $15 billion plan to give companies who
hire unemployed Americans an exemption from paying payroll taxes on
those workers through the end of this year. It also provides a $1,000
tax credit to employers who keep new workers on the payroll for at
least for 52 weeks. Will it work?

As you know, I’m very skeptical of the whole stimulus idea to begin
with. The problem with a tax credit for hiring new workers is maybe
that a lot of those workers shouldn’t be hired where they’re gonna be
hired. I’m a tax cut kind of guy. I’m always aiming for tax cuts. If we
want to get the economy back on a sustainable long run track of
economic growth we don’t want to bias the economy in favor of capital
or labor. If we’re going to have tax cuts we want them in general so
firms are not biased to use capital in bias of labor. That might be
good for labor in the short run. In the long run, it’s not good for
labor because workers wages tie closely to productivity, which is tied
closely to the amount of productive capital they have to work with. So
by biasing the production in favor of labor, you put more people to
work today but you reduce capital and productivity, which means their
compensation in the long run will be lower. These are gimmicks. I
realize politically that employment is a big problem, but you can solve
that problem just as well with general across the board tax cut tax
credits that aren’t targeted at one factor of production.

The
administration is stuck with terrible unemployment, but also a $1.6
trillion deficit that’s getting slammed. So let’s say you were the
president’s Jobs Czar. You have his ear. What do you tell him?

I would say cut taxes generally.

What kind of taxes? Payroll?

I
would cut payroll taxes and corporate profits taxes. By cutting the tax
on corporate profits you don’t bias employers toward labor. If you
really are worried about the deficit being too high and you really do
want to put private sector business activity back on the tracks and
moving along so that more workers are hired and wages rise, you have to
make it more attractive for business in general to produce more.
Cutting corporate taxes does that, if you’re asking me as your economic
adviser to get employment going in a sustainable pro-growth way.

Would you make the cut temporary for budgetary reasons, or would you make it permanent?

If
it were up to me I would eliminate the tax on corporate profits. I
would make it permanent. If you announce that it will only be temporary then it won’t have the stimulus effect. It’ll have some, but a lot of
production plans go on well beyond three years. If they’re building a
factory that’s in operation 16 years down the road, you diminish the
effect if you limit the time. I would prefer a temporary cut to no
cuts. But still, a permanent tax credit to hire new workers still
really biases the production decisions.

One concern here would be that you’re cutting taxes dramatically on
top of a significant deficit. In fact, the size of the deficit is
making some budget experts call for additional taxes, like a
broad based consumption tax, or value added tax (VAT), possibly in
exchange for slight reductions in the income tax. What would you say to
that deal?

I am very leery not so much for economic reasons,
but because the income tax has been so deeply instituted into the
political structure in America that I can’t really imagine it being
significantly scaled back. As I understand it, the idea is we’ll move
to a VAT and we’ll get revenue from there and we’ll offset revenue from
the consumption tax by eliminating the tax on middle and upper class
income and corporate profits. Right?

Politically, I’m skeptical that that would happen. Academically I think
you can have a serious and interesting debate about the virtues of
income and consumption tax. And if I had to choose between the two in a
hypothetical world where the taxes are implemented with the best
interests of the public in mind, I would probably go with the
consumption tax. I’m sure I would, in fact.

I could imagine two
years from now, if there’s another terrorist attack or the recession
deepens, or whatever emergency happens: whatever party’s in Washington
says we need more revenue and the income tax is still there, so they
start using it again. People are accustomed to paying income taxes.
With a VAT, it’s more hidden. You walk into a store and you pay the
price that’s listed and it’s not obvious to you what portion is tax. We
won’t pay attention to it in the same way there’s an income tax form
that you mail in in April. I’m worried that the political deal won’t
take place as advertised.

*Corrected.

Witness the fruits of bipartisanship! The Senate jobs bill passed a key hurdle yesterday with five Republican votes, including newly minted GOP Sen. Scott Brown of Massachusetts. This wasn’t the crucial vote, mind you, but rather a vote to allow voting. Yet the press is treating the event not unlike a solar eclipse. Read only the headlines, you could be forgiven for thinking the official name of the Senate bill was in fact the Scott Brown Voted For This! Act.

Indeed, the news is all about Brown casting one of the five rank-breaking votes. He revived the moderate Republican wing! He is the twinkle in the faint glimmer of bipartisanship! He cast a hard vote for America, hateful Facebook messages be damned! Know hope.

So this jobs bill. Does it do anything?

Eh, would be my answer. To provide some context, this bill is
Sen. Harry Reid’s $15 billion response to the Sens. Baucus and
Grassley’s $85 billion bipartisan retort to the House Democrats’ $150
billion jobs plan. It’s like the baby girl within the Russian nested dolls,
sharing the resemblance, if not the impressiveness, of its babushkas.
To get a read on how many jobs it could produce, we turn to a helpful blog post by Doug Elmendorf of the CBO:

Through its effects on wages, prices, and profits,
the policy would add 8 to 18 cumulative years of full-time-equivalent
employment in 2010 and 2011 per million dollars of total budgetary
cost, measured in terms of lost revenues. Thus, the budgetary cost of
increasing employment by one full-time person for one year would
probably be between $56,000 and $125,000.

By the CBO’s count, $15 billion could create the equivalent of 120,000
and 270,000 full-time jobs for one year. That’s not chump change. But
the country would need 200,000 new jobs created each month for the next seven years
to hit 5 percent unemployment by 2017. We’re not talking about a game
changing policy. Its impact on employment — like the bipartisan
gesture that helped move it to a final vote — will be small and likely
without consequence.

Twenty percent of Americans lack adequate employment — ie, are unemployed or looking for more work — according to a new Gallup poll. Isn’t that more than twice the official unemployment rate of 9.7%, you ask? Yes, but if you factor in measurements for marginally attached and discouraged workers — combined with those nebulous seasonal adjustments from the Bureau of Labor Statistics — you got a BLS figure very close to 20 percent, as well. There are really only two points to make about this horrible news.

1) This is why we need stimulus
Unemployed and underemployed Americans spend about 40% less per day than employed Americans, according the poll. The implications for the broader economy are fairly straightforward. Some employers asked to react to the proposed hiring tax credits in the Senate jobs bill have said they’ll only start hiring when they see demand recover. You can imagine how difficult it is for private sector demand to recover when 20% of Americans are unemployed and pinching pennies. One of the reasons I continue to defend the stimulus despite its flaws is that government spending is utterly necessary to supplement weak private demand. Indeed, government spending is the only thing keeping private demand from falling off a cliff. As I wrote two weeks ago:

If
you look at personal income minus government transfers — this is a good
proxy for how the private sector is doing at generating income growth
without counting government assistance — that measure has fallen by 8
percent since the recession began. But disposable personal income—
what people have the ability to actually spend, due to tax breaks and
government transfer payments like unemployment insurance — is actually
up one percent.

2) This is why people are angry

Underemployed Americans have a slightly better impression of the president than the general public, according to the Gallup poll. But 20 percent underemployment is a headwind against which any ambitious domestic agenda will struggle. The instinct to blame Obama’s first year travails on all things except the economy — what Jon Chait likes to call the Wehner Fallacy — ignores that fact that joblessness has grown significantly under Obama even as the pace of job loss has slowed significantly under him. This is not to say that the president has done a universally exceptional job of advancing his agenda; merely that he inherited an economy at the nadir of decelerating employment, and that economic conditions color Americans’ attitude toward their government.

---

President Obama’s health care proposal doesn’t look too different from the Senate bill that still hasn’t passed the House. As an overture to House Democrats, the plan increases subsidies for low-income families and delays the excise tax until 2018. In other words, the special deal for unions is now a special deal for everybody. Hooray for the delaying of pain, right?

Well, not exactly, if you — like me — were a huge fan of the excise tax as a crucial fulcrum of reform. As Jon Rauch put it succinctly, the policy that employer health benefits aren’t taxed majorly distorts health care costs because it “subsidizes high-cost policies, hides the costs of those policies from
employees, and denies employees the opportunity to shop around.” The excise tax would have chipped away at that distortion. Now the date of chipping is eight years away — a veritable light-year in Washington, where mid-terms turn every two years into a jousting match for pandering.

Anyway, I was feeling a little depressed about the new tax policy. So I called Henry Aaron, a senior fellow and health care expert at the Brookings Institution, to ask if I should still support the bill. In short, he said: yes. Here’s our talk.

{To read more about the excise tax, check out my original defense of the Max Baucus health care plan. Also see my critique of liberals who fudge the reasons why the tax would reform health care costs.}

Why is the excise tax compromise in the bill?

I think the reason it’s there is for political purposes. I think what
was put out should be read as an instrument for trying to maintain or
recapture the support of enough Democrats in the House and the Senate
to modify the Senate bill through reconciliation and pass it in the
house. My guess is that the administration wanted to make sure that
organized labor was on board and this was discussed beforehand. Like
most analysts, I think more would be better. Kicking in earlier and a
lower ceiling. That said, this is better than nothing which is I’m
afraid what we’re risking if this effort.

Even if Obama gets reelected, by 2018 we’ll be coming up on mid-term
elections halfway into the first term of another president, in what’s
likely to be a very different Congress. That’s a political eternity
away. Is it likely that this excise tax will be gutted, again?

Anything is possible, even if it had a sooner or earlier effective
date. It’s going to depend on if there’s a sufficient majority in
Congress to sign a bill and end it. The presumption will be that it
will go into effect. That’s a different default position. But none of
this is written into the Constitution. Congress can change things.

So will the excise tax “work”? Will it actually help to slow the growth of health costs?

I think it’s part of a portfolio of initiatives that move int he right
direction. It won’t be revolutionary. There”s an old saying among
economists. They got the sign right. I can’t guess on the magnitude. I
think we can say that the sign of the impact is in the right direction,
but the magnitude of the impact remains to be seen. It’s conceivable
that the growth of health care spending could attenuate for reasons
that have have nothing to do with this bill, so the indexing formula
would bind even less. The principle would have been established that
there should be a limit to the [employer provided health care] tax
benefit. It’s a desirable change.

What else is a part of that “portfolio of initiatives” that you think move health care spending in the right direction?

All those ideas in the senate. The innovation center. IMAC. {More here.}

Back to politics: Do you think this compromise will give health care reform a better shot at passing?

I’m presuming it wouldn’t be there unless unions said they’re on board.
There are a number of members of the House on the left whose support
for the bill has come into question. If organized labor comes behind
the bill, they’ll have an easier time.

President Obama plugged a $950 billion health care reform plan yesterday in advance of Thursday’s health care summit with Republicans. Marc Ambinder has the rundown. There are plenty of good reasons to be critical of the health care plan: you can say it doesn’t do enough to dramatically reform a broken system; or it doesn’t do enough to ease the government’s entitlement commitment over the next generation; or perhaps that it doesn’t spend enough to reduce the burden of exponentially inflating health care premiums. Those sound like reasonable critiques that I’d anticipated discussing today.

One not-terribly-reasonable critique of Obama’s new health care reform plan that I did not anticipate discussing today is that it “loses” its “jobs component.” Health care reform lost a jobs component? Health care reform had a jobs component? I’m confused.

MSNBC’s John Schoen writes:

When President Barack Obama was pushing his plans for health care reform last summer and fall, he said change was needed to put the nation’s economy on a firmer footing.

But with his new
compromise proposal Monday aimed at forcing a congressional vote on the
issue, Obama appears to be making a pure political gambit with little
explicit reference to the economic struggles still afflicting millions
of jobless workers.

… Obama no longer
can argue that the health care proposal will create jobs or at least
remove an impediment to job creation, some analysts said.

I
don’t know exactly what I’m supposed to make of this. When was health
care reform ever plugged as a job stimulus bill? A respectable job
stimulus bill would go into effect immediately. Most of the major
provisions from health care reform don’t kick for another four years.

Maybe Schoen is trying to say he’d like Obama to drop health care to focus on job growth (even as a jobs bill is working its way through the Hill’s digestive tract). Now, it’s
reasonable to say the president should have passed a larger, or more
targeted, stimulus before going on to enact his campaign agenda. It’s
also reasonable to ask whether a second, distinct jobs bill might pull
down unemployment faster. But it is not reasonable to say Obama should have
suspended his campaign agenda indefinitely in January 2009 and put a
hold on all reforms — in health care, and financial regulation, and
carbon emissions, and immigration — unless they have an immediate and tangible impact on job creation. Beneath the rubble of the recession is a country with all of its old flaws and imperfections, and they need our attention, too.
______

On a separate, slightly related note, health care inflation over the last decade has corresponded with remarkable job growth in the health care industry, as one of my favorite jobs graphs ever does a good job of showing. The Council of Economic Advisers predicts
that in the next decade, four million jobs will be created in the
health care industry — more than in any other industry, and twice the
jobs created in education and financial services combined. It’s
reasonable to argue that an economy overly reliant on health service
jobs is undesirable, that it bleeds employers and employees of income,
and crowds out investments in other sectors. But one natural result of
health care taking over 17 percent of the economy and growing fast is
that it happens to create quite a lot of work.

The last time I wrote about Buzz, Google’s new Gmail add-on that lets you share links and pictures with friends, I said I loved the feature and left it there. In other words, I completely underestimated/missed the big story of the week, which was that privacy complaints have swarmed and covered Buzz like bees on a bee keeper.

The accusations were serious. To provide early Buzz users with a built-in network of friends, Google automatically culled each Gmail user’s most frequent contacts, and publicized the list in their profile. For some, the make-up of that list was innocuous. For others who use email to correspond with acquaintances who aren’t friends (like plumbers or kids’ teachers) or worse, acquaintances who aren’t public (like secret sources and secret lovers), Google’s reveal was an embarrassing and unnecessary breach of trust.

The Buzz breach was without question a mistake — just as it was a mistake for Facebook to upchuck its users’ photos onto the Web during its last privacy “update.” But the amazing vitriol these episodes produced make me wonder whether I’m way toward the indifferent end of the outrage spectrum.*

This is me speaking entirely personally, so don’t mistake what I’m
about to say for objective analysis about The Age of Google: I do not really care about my
privacy online. I never think about it. If I send a very
personal email to a friend about, say, a relationship with a girl in Boston and
the small Gmail banner ad whispers “Expedia: Low Prices to Boston!” I
notice, but don’t really care. When I sense that Facebook is scanning my Interests and Activities in my profile because it’s offering me tickets to one of five bands I’ve listed as favorites, I notice, and don’t really care.

So when Daniel Lyons of Newsweek writes that we’re paying for free services like Gmail and Facebook with our privacy, my gut response is: good deal! I assume that what I write will be between me and the ad robots trawling Google’s online kingdom, and that’s fine with me.

And yet, that’s precisely why the Google Buzz episode was such a damaging mistake. Our private information — or contact’s identities — went beyond the ad robots and onto the screens of friends who were never meant to be privy to the information. It’s one thing for somebody to be comfortable that his private conversations being watched by an algorithm’s eyes. It’s another to worry that every time a new Google or Facebook product roles out, another sliver of his once private information will leak into the public domain. I don’t care much about my online privacy today. But if Google and Facebook insist on changing the rules every six months, I could be persuaded to give a damn.

__________
*In the long run, my utopian wish is that we all recognize that the Web is teaming with our private information, and adjust our social expectations accordingly. My dream would be that one day, we realize we’re living in an age of Embarrassing Information Inflation. That is, we all recognize that there is so much potentially embarrassing information about us on the Web that the individual value of each morsel of potentially scandalous or ignominious information goes down. I recognize, however, that this would first require us to stop caring about scandals, and … well, I’m feeling terribly optimistic about that.

The current debate about the budget usually goes something like this: The left says the right has no ideas (or at least no new ideas) and the right says the left has no good ideas (or at least no ideas that won’t blow up the size of government). So here I go: I do think the right has some ideas, and I’d really love the smartest thinkers on the left to take them more seriously.

Here’s Paul Krugman’s most recent column on Republican vacuity. It’s good, it’s cogent, it’s mostly right. It’s also frustrating. He’s accusing Republicans of refusing to have “serious discussions” about the budget. Then he identifies some Republican ideas and doesn’t discuss them seriously.

Krugman is writing about the right’s plans to reform entitlements. (It’s important to understand throughout this that Krugman isn’t as concerned about our deficits as a lot of other politicians and policy thinkers.) He criticizes
the idea of putting a hard budget on Medicare (as Paul Ryan’s plan
would do) as an act of Republican hypocrisy. He is against
means-testing entitlements, because he’s afraid
that making Social Security mainly a benefit for the poor will make it
unpopular. These are technically defensible positions (Republicans are
being hypocritical on Medicare cuts, and means-testing entitlements
might erode their popularity). But let’s agree that these are, in fact,
“serious discussions” worth having. Putting entitlements on a tighter budget has left-of-center defenders. Focusing aid on those who need it most is a reasonable solution to cutting costs in an underfunded program.

Look, Krugman is under no contractual obligation to agree with anything
Republicans say.  At the end of the day, my sense is he thinks
entitlements don’t need an overhaul as dramatic as others want. That’s
fine, and possibly even right. But it’s frustrating to hear him say
“the GOP has no solutions, the GOP has no solutions” and see him swat
two serious solutions out of the air because he doesn’t think the
authors are being intellectually honest.

President Obama’s proposed commission to solve the long term debt crisis has been met with disdain across the political spectrum. But some commenters — mostly liberal economists —  think we don’t have a crisis in the first place. After all, they point out, look at the bond market. Short term interest rates are near zero and the 10-year yield is in the mid-3 percents, which is awfully low. The bond market doesn’t see a fiscal crisis, so why prepare for pain?

Paul Krugman has been making this point for a while. Here he is in August 2009:

Right now GDP is around $14
trillion. If economic growth averages 2.5% a year, which has been the
norm, and inflation is 2% a year, which is the target (and which the
bond market seems to believe)

And again in November 2009:

Right now, however, the bond market seems notably unworried by
deficits. Long-term interest rates are low; inflation expectations are
contained (too well contained, actually, since higher expected
inflation would be helpful). No problem, right?

Krugman could be absolutely right. But it’s a little against character
to watch him put this much trust in a market — a fraught
market at that, since acute uncertainty surrounding global markets has
created a flight to safety in US dollars that will turn when the world
economy recovers. But the deeper problem with deficit-defenders
thinking the bond markets are so smart is that the administration
running up the deficit seems to think the bond markets are a little bit
dumb.
So dumb, in fact, that they can be fooled into a false sense of
security by a non-security discretionary spending freeze that was
righteously mocked by … everybody. Here’s Noam Scheiber on the administration’s thinking behind the freeze:

…Given the
difficulty of doing anything about the long-term deficit next year, the
administration needs some signal to U.S. bondholders that it takes the
deficit seriously. Just not so seriously that it undercuts the extra
stimulus.

The Orszag approach [writing a budget that’s tough on discretionary spending] just might accomplish that. Given the amount of
domestic discretionary spending in the federal budget–about $700
billion this fiscal year–we’re talking about cuts of, at most, several
tens of billions of dollars if Orszag holds the line on spending (and
probably less once Congress weighs in). Which means the cuts wouldn’t
come close to offsetting the likely stimulus. But they just might buy
some credibility in the bond market, which could defer the day when the
real deficit cutting has to start.

This is about more than what the bond markets are saying. It’s about how what they’re saying now should guide policy making.
Either the bond market is very wise and should act as a lighthouse for
our long-term fiscal plans, or it’s so hilariously gullible that it
will swallow a measure that was mocked by every policy writer with a
keyboard and an internet connection. If bond markets can tell the
future, they can’t be tricked with gimmicks. If they can be tricked with gimmicks, we shouldn’t
trust them to tell the future. So who is right?

When complicated issues like the debt suddenly become national news controversies, sometimes the tendency is to emphasize the drama of the story rather than explain the basics of the issue. What is the debt? Why is it growing? Should we be terribly concerned about it? And how would we fix it if we had to?

To answer those questions, I spoke with Martin Baily, a senior fellow in the economic policy department of the Brookings Institution and the former chairman of the Council of Economic Advisers during the last last two years of the Clinton administration. Here are his answers:

{I also spoke to Rudy Penner, former CBO director under Reagan, about what a responsible budget would look like if we had to slash our deficits without raising taxes. It’s scary. Read it here. To get some perspective on the administration’s messaging on the deficit, check out this interview with Jamal Simmons, a political communications expert with the Raben Group.}

What are the main drivers of our debt?

Social Security is
turning negative, having switched from providing a surplus to a
deficit, and will continue to move negative. Medicare is the big
elephant in the room. Also Medicaid, much of which goes to old people
because it supports nursing homes. Medicare spending just grows and
grows and there’s no real ability to restrain it. Then you’ve got
defense spending, which has risen some in the post-911 period. It’s not
as big as a percent of GDP as in the Kennedy years or previous episodes
in the US, but it has grown. In the 1990s we got a peace dividend and
that helped us balance the budget. Today I don’t think a lot of people
are saying we should cut back on defense. 

And then you’ve got
interest on the debt. Given that most of our debt is pretty short term,
as interest rates rise, the interest is going to get larger. Then
you’ve got the rest of government. I’m sure there’s a lot of waste in
the rest of government, but there are also things that we need to do
that we’re not doing, like infrastructure spending or converting to a
lower carbon economy and that’s going to be expensive.

So
there are ways to cut back on discretionary spending but it’s going to
be very hard to reduce it over all. And this leaves us without the kind
of the money we want to invest in high speed rail, nuclear power, and
so on. The private sector is good here but we also need some government
money.

There are still economists, mostly liberal economists, who would
argue that we don’t face any kind of debt crisis. Yes the debt is high,
but we need it now and can afford it later. Are they wrong?

I think they are wrong. I was just watching Joseph Stiglitz on Yahoo
Finance, and he made that argument. And the way you can make it is to
say, long term interest rates are very low. The markets are not
signaling they have any concerns. When there is a crisis overseas they
flee to US Treasuries, so we are still seen as a safe haven for
investors. We’ve got a big economy, a growing economy. They can make
that case.

I just don’t see an infinite appetite for treasuries, given how many
are being held. In principle we could keep borrowing at high rates but
it will have an impact on the dollar, and I think 10 year rates are
going to rise as the economy begins to recover. Now there’s not a big
competition for funds. There’s not a lot of investment demand. So
interest rates are low. But demand will come back and interest rates
will rise. But there is a limit to how much we can borrow and I think
Treasury is concerned about that.

As
you mentioned, financing the debt is easy today with zero-bound short
term interest rates and a 10-year bond yield of 3.6%. Why are rates so
low and what factors could make them go up?

The main one is
a recovery of the global economy and a recovery of the US economy. We
don’t want to wallow in a deep recession forever. If we recover that’s
great for tax revenue. But on the other hand, it means that business
investment picks up and there’s no longer the same excess of savings
floating around. it depends what’s happening in the global economy. If
we recover and the rest of the world remains weak, we can continue to
tap foreign funds. But you can only do that with this sort of large
scale foreign borrowing.

Do you think Americans “get” the debt crisis?

The
thing that I find is that the level of the national debate seems to be
so bad. People aren’t finishing their sentences. There’s widespread
support about doing something about the deficit. When you ask
Americans, “should we reduce the deficit?” they say yes. “Could it hurt
our children’s future?” Yes. “Should we cut Medicare?” No! “Social
Security?” No! “Defense?” No! They say cut foreign aid. So there’s a
lack of connection between what the money is used for and what people
are willing to pay for. 

I don’t think the political debate is
going to help us. Nobody wants to talk about tax revenue unless it’s
for the top 250K. You need broader revenue increases unless you make
drastic cut backs in spending. There are health reform delivery changes
but it doesn’t change enough. Palin may say no death panels. That’s a
defensible position, but she needs to finish that sentence. If you’re
going to spend half a million dollars to keep a 90-year old alive,
that’s going to come back to tax payers. If you want to keep [benefits]
where they are, then we need to raise taxes.

I’m a Democrat and I won’t endorse a Republican road map [like Rep. Paul Ryan’s,
which turns Medicare into a tightly budgeted voucher program]. But it
puts a budget on health care. That’s something that many European
countries do. I’d like the administration to say these proposals were
put on the table. Nobody going to vote to abolish Medicare. But at
least somebody’s trying to get their hands around the issue. If you
don’t want a voucher program, fine. But engage in that debate.

{Editors note: That paragraph is a nice way of explaining what I was trying to say in this blog piece last week}

So how do we do it? What would a rational budget reform plan do?

There
are straightforward solutions on Social Security. I would say keep
adjusting the retirement age. For Medicare, I would think seriously
about creating a budget. I think that would change the delivery system.
If you reform Medicare, you could dramatically change the health care
system. Private health insurance pays for hospitals visits pivoting off
how Medicare pays for hospital visits. I think we know more information
about what works and doesn’t work, and there’s been some blowback on
that since the doctors have no economic incentive to use the best
approach. So create a budget limitation. If people want
fee-for-service, then they should have to pay for it.

On the
tax side, I’m not a tax expert but I think that some kind of phased-in
— the economy is too weak now, but phased in — a dollar-a-gallon gas
tax in the next seven years and think about other uses of carbon. It
will discourage use of carbon and help us move toward a more carbon
efficient economy. If somebody were willing to go for a VAT [value
added tax], I think there are a couple advantages. One is that it’s a
consumption tax, and most economic tax experts tell you that’s
consumption taxes are better. If you earmarked it for particular things
like sustained defense it might get some Republican support.

It
has to be a combination of revenue increases and spending controls. At
this point revenue is coming in well under 20 percent of GDP, and even
if we do the best health care reform in the world, well need some way
to raise revenue.

President Obama is stuck between a necessary deficit and a ballooning debt, and it’s hurting his ability to explain his economic policies. On the one hand, he wants to defend his latest budget, which comes with a $1.6 trillion deficit. On the other hand, he’s created a panel to brainstorm ways to make his deficits smaller. That’s not a substantively hypocritical position — it’s perfectly reasonable to run short term deficits and also worry about the long-term debt — but rhetorically, Obama has twisted himself into a pretzel. He’s actively trashing the idea of red ink as its pours out of his budget.

To get a better feel for the issue, I emailed with Jamal Simmons, a Principal at the Raben Group, who has worked in politics and communications for 15 years. Here is our discussion:

Plenty of folks blame uber-partisanship in Washington for the
unwillingness to do anything about the budget. But you think there are
understandable incentives for politicians to avoid making hard choices
and taxes and spending. Explain.

When political leaders
examine the history of past efforts to deal with budget deficits there
are negative lessons to be learned. President George H.W. Bush struck
an agreement with Democrats in 1990 that reversed his “no new taxes”
pledge and he was defeated in 1992. The Democrats in Congress passed a
budget in 1993 that also helped close the budget deficit and they were
thrown out in 1994. It will take an external factor like the one Ross
Perot became in the early 1990’s to push the political system to act.

Obama
likes to remind listeners that he didn’t create this country’s dire
fiscal situation. And it’s true. But he does own it. Do you think it
makes Obama look weak to blame a budget he wrote on a former president?

It doesn’t make him look weak. Americans tend to have short
memories and someone has to remind them that Republicans created this
mess and they should help clean it up which they are not.

Imagine
you’re Obama’s speech writer: you have to make the case that your
budget with a $1.6 trillion deficit is defensible, but that we need to
start thinking seriously about reforming our long-term debt. How do you
thread that needle rhetorically?

The President is the best speechwriter I know. He can find the words.

At
the Peterson-Pew conference on Tuesday, it seems you and the other
panelists agreed that the time to scare Americans about the debt is
now. But what if that’s wrong? What if scaring Americans about the debt
is wholly counterproductive when running trillion-dollar deficits for
the next few years?

I disagree that Americans need to be
scared. Americans need to be informed. One of the things people liked
about candidate Obama the most is that he spoke to us like adults. If
he or someone else lays the case out and provides a reasonable course
of action, Americans will make the right adult decisions. The problem
is the political leaders will have to take lollipops out of our hands
and nobody likes to do that.

Let’s talk about Republicans.
Their behavior has been occasionally stunning. They shut down the
federal govt in 1995 to force Medicare cuts, and now they’re against
Medicare cuts. Seven Republicans sponsored the deficit commission and
then voted against it after Obama endorsed it. They are, and likely
will be, against anything that can be seen as an accomplishment for the
administration. Against an obstructionist majority like that, what
sense is there to push any kind of serious debt busting plan?

If
the GOP wins seats this year, they will bear more responsibility to
govern. If they choose not to, I am sure the public will punish them
for it. It’s time for a few leaders to emerge on the Republican side of
the aisle. The country needs them.

What would your debt-busting wish list look like? VAT, Medicare means-testing, defense cuts …

Everything should be on the table. No sacred cows.

___
Read my last interview on the debt, with Reagan’s CBO director Rudy Penner. Penner explains what a responsible budget would look like in 20 years if we followed the Republicans lead and refused to raise taxes (or, alternatively, refused to cut spending). The results are shocking.

What makes cities happy: high wages? high employment? highly creative people? The Atlantic’s demographic expert Richard Florida poured through some data on his blog yesterday and concluded that the factor that correlated most highly with cities’ self-reported happiness was … percentage of college degrees. Does that mean, as Catherine Rampell offers, that education makes you happy?

Well, as Catherine and most everybody else know, causation is not
correlation. Those who are more likely to attain bachelor degrees are
also more likely to have come from parents with higher incomes, and
cities with higher incomes also correlate strongly with happiness.
Moreover, I have natural doubts about the reliability of self-reported happiness surveys, since quantifying happiness seems like a fraught exercise. But anyway, here’s what Florida found:

Human Capital [measured as share of the population with a B.A. and above]: Happiness at the city or metro-level is more
closely associated with
human capital with a correlation of .68 – the strongest correlation of
any of the variables we looked at. The scatter-graph below
shows a fairly linear relationship.

The Economix blog earlier produced this map of the happiest states.

Gallup found that Hawaii, Utah and Montana were the happiest states. San Jose, CA, and Washington, DC, (woot!) turned out to be the happiest metro areas. There you have it, I guess: Get a bachelors degree and move to Salt Lake City. The secret of happiness solved. Eat your heart out, Plato.

The Recovery Act was designed to target economic production over job creation. Today quarterly GDP growth is 5.7%, and the unemployment rate is 9.7%. So, naturally, the stimulus being judged for its failure to create jobs rather than credited for boosting economic production. Why?

Ezra Klein argues the administration has struggled to explain the stimulus because the stimulus’ purpose has been
shifting: it’s about production! no, infrastructure! no, jobs! demand!
and so forth. There are other reasons why the administration has slogged through economic PR…

First, 10 percent unemployment would hurt any administration’s economic
message — period/the end/full stop. Second, first point notwithstanding, the
administration badly underestimated the impact the recession would have
on joblessness. The CEA warned in early 2009 that unemployment would
hover around 9 percent without the stimulus; with the stimulus,
it passed 10 percent. This miscalculation hurt the White House last
year by keeping them from calling for a
larger, more job-oriented, stimulus, and it continues to plague the
administration by undercutting its
authority on job creation and the economy this year.

Third even the new organizations considered objective and mainstream have struggled to explain the stimulus and its frustrations. I think the fine reporters at The Washington Post mislede with sentences like this:

The giant economic stimulus package enacted a year ago has helped
stabilize the economy but has not made much of a dent in the nation’s
vast unemployment.

The Obama administration is acknowledging that its program of spending
cuts and tax breaks has yet to ease joblessness, and White House
officials are increasingly engaged in shaping the details of new
legislation to boost job creation.

I guess it depends what you understand by “made much of a dent” and
“yet to ease.” It doesn’t really matter who you listen to about the job
creation numbers — the administration says about two million jobs
“created or saved,” others say much fewer, I think it’s at least hundreds of thousands — but it’s clear the stimulus bill made a dent in unemployment numbers and eased
the jobless rate. No, it obviously hasn’t stopped U1 from climbing to
10 percent. But how can we know that 10 percent is not a dented, or
eased, unemployment figure? There is no parallel universe in which we
can play out a no-stimulus (or Republican stimulus) scenario for the
last twelve months. I know what WaPo is trying to say — and I think Alec MacGillis is a particularly great reporter — but even seemingly anodyne sentences like this make the stimulus appear to have been a total wash for jobs; yet I don’t know any nonpartisan sources who would agree with that interpretation.

_____
Bonus: It keeping with the thesis of the articles, here’s credit where it due: WaPo has a great graph of the stimulus’ shifting focus

President Obama secured the support of Republican leaders for his bipartisan commission to look at ways to reduce our long term debt, but the GOP insists that any solutions with tax increases will be dead on arrival. So what would a sensible budget reform plan look like if we refused to raise taxes? Or, for that matter, if we refused to cut spending, and only raised taxes?

Rudolph Penner, former director of the Congressional Budget Office under President Reagan, has answers. With a team of academics, business people and public administrators, he answered those two questions in a monster report from the National Academies Committee on the Fiscal Future of the United States. I spoke to Penner about his debt-busting plans and the politics of deficit reduction.

Penner targeted a public debt-to-GDP ratio of 60 percent
by 2020. With the debt-GDP ratio racing out to 100
percent by 2022 — and possibly doubling again in the following 20 years when boomer entitlements explode — that means he needed to go at the budget with a
scalpel and a sledgehammer: putting entitlements on a budget and slashing defense until wars become nearly impossible expenditures.

Our interview is here:

Your team first drew up a budget to reach your 2020 target with all spending changes, and no new taxes.
So what would a responsible budget look like in 10 years if
politicians refused to raise the tax burden on Americans?

The
answer is you have to do some very, very dramatic things. We reduced
the growth of Social Security to the level of benefits that could be
financed by the payroll tax structure and moved the full
retirement age by five years. We dramatically reduced replacement rates — benefits
to earnings late in life, although we didn’t reduce anybody’s benefits below the
purchasing power [inflation index] except for the most affluent.

On
health we chose to slow the rate of growth of health costs … Not speaking for the committee I think the only way to do it is to put
Medicare and Medicaid on a fixed budget. That would require vouchers
based on income for Medicare that could vary by geography and health.
In any case we’re talking about something very severe. Then with all
other speding, we squeezed defense so that they couldn’t invest in new
weapon systems but could retain their personnel. You could have minor
foreign interventions but nothing on the scale of Iraq and Iran. On
infrastructure and reserach we also clamped down on. These are
the draconian changes on the spending side if you keep taxes
where they are. 

A lot of Republicans — and some Democrats
— are calling for even more tax cuts across the board for
extended periods of time. But this budget picture is dismal enough
already. Did you consider what it would look like with even fewer taxes?

The thought of actually cutting the tax burden is really quite implausible.

Now tell me what a reformed budget would look like if politicians
decided to keep spending stable and make all the reforms on the tax
side.

At the other end of the spectrum, we said let’s keep our promises to
Medicare, Medicaid and Social Security while keeping the 60 percent debt-to-GDP figure. The tax increases are quite extraordinary. 

We had two
strategies for financing the package. We increased all rates
proportionally — including capital gains and the AMT — until the top
[marginal income tax] rate rose to 50 percent [from 35 percent, where
it is today]. We did that for around 2020. At that point we
introduce a VAT [value added tax, or consumption tax], first at one percent and growing to
8 percent by 2040. It had to grow fairly rapidly. For Social Security, we had to
increase payroll taxes from 12.4 to almost 15 percent. And then we
needed a surtax on top of all that. All this would take us from a total
tax burden including state and local from below OECD average today to
where by mid century we’d be considerably above average. Spun out to
2060 we’d be one of the highest tax burdens in the world right
alongside Denmark and Sweden.

The other approach was to
radically reform the tax system, getting rid of all tax expenditures
[such as tax exclusions for employer health care and pension contributions … see more here] like capping the employer health exclusion. It’s really, really
remarkable how much money you get back from tax expenditures,
especially from capping the health exclusion. We could actually lower
rates over time with that solution to the situation, while keeping the overall
tax burden the same.

Why deficit reduction this so hard
politically? Is it the current climate, or is that the things that need
cutting are naturally politically intractable?

I’ve been watching the political scene for 40 years now and it’s
never been worse. We could talk for a long time about the reasons for
that. Whatever the cause, at this moment we’re marching hellbent for
fiscal crisis. If you want to know what happens in fiscal crisis, look
at Ireland and Greece. There comes a point when you have no choice but
to reform the budget. Ireland can try to inflate their way out of the
problem. We have one of the shortest maturity of debt in the world, so
if we start to inflate, interest rates go way up. 

You’ve argued that Obama’s budget doesn’t scare us enough about the debt. But he’s running $1.6
trillion deficit next year. Surely he doesn’t want to convince people that
deficits are scary just yet, right?

A lot of people argue that’s a conflict: that there’s a conflict
between a short term and a long run. But you can’t deal with the long
run until the recession is closer to being over. You don’t want to hit
incomes today, but you can pass a law today that makes the kind of Social Security changes we have in our book, and they would not be
effective until 2012 and go into effect extremely gradually. You can do
things with Medicare. I suppose in economic theory there are subtle
problems if people are far-seeing and they see reductions in their
benefits — rational expectation economists would say they’d cut
spending immediately. But I don’t happen to think people are so
far-seeing.

I would focus assistance on safety net programs like food stamps. The
institutional arrangements at state and local level means they cut back
more than they need to and I can see some assistance there, and I would
pay for it. I wouldn’t mind short-term stimulus. That said, there’s
this idea for a payroll tax holiday for businesses that employ more
people. I think that will be a lot of wasted money — subsidies for
people they will be employed anyway. In any case, my bottom line is
that I don’t see a conflict between short and long term.

Twitter posted its best month for unique visitors ever, according to analytics from comscore. The credit, tech analysts seem to agree, goes to Google’s Live Search feature, which culls tweets in a box on its results page under the first few links.

Earlier this month, Google unveiled its own social media program Buzz, a Gmail add-on which lets users share links and photos with a network of “followers.” In other words, it’s a Twitter feature — and possible Twitter Killer! — right next to your inbox.

Google giveth and Google taketh away, I suppose. But my colleague Dan Indiviglio made an excellent observation just moments ago:

When will Google’s Live Search include Buzz items in addition to tweets? The answer is: they already do. The Live Search box collects both tweets and Buzz items, according to the Google blog, and it will be interesting to follow how Live Search continues to drive uniques to both Twitter and Google’s Buzz pages.

With Buzz traffic exploding Twitter shouldn’t feel safe about relying on Google search pages to drive unique visitors. Twitter’s unique visitor count flat-lined for the
last quarter of 2009. Some analysts predicted that Twitter’s hype had
simply run out of juice, and that Buzz could capture some of the market
because you don’t need a separate application to run it: Buzz lives
next to your inbox, after all. I know Buzz’s privacy fiasco thew a wet blanket on the product’s roll-out, but I still see a bright future for the product.

President Obama is creating a bipartisan commission to reach a consensus on how to bring down the deficit. Michael Tomasky has a great, thought-provoking blog post at the Guardian about the mechanics of deficit reduction, but I don’t agree with his take on the politics of tax increases.

Tomasky beings by pointing out that the top marginal tax rate in the
1950s was 91% on income earned above $200,000. Today it’s 35% on income
earned over $360,000 (see this interesting PDF chart). Tomasky concludes that we should be talking more about raising the top marginal tax rate:

When Washington talks about the deficit and entitlements, people
always talk about cutting. About living within our means … And if you broach the
subject of what the people at the very top should contribute to the
maintenance of this condition, you’re considered extreme and unserious.

On the contrary, it seems to me that everybody who doesn’t self-identify as Republican talks quite a bit about making the people at the very top contribute more. House Democrats proposed to pay for health care reform with a
surtax on the top one percent. Obama made it clear as early as 2007 that
he wants Congress to cancel the Bush tax cuts for Americans making more than $200,000 — which is effectively a tax increase. Calling for various new taxes on the rich isn’t extreme, it’s mainstream. Tomasky
goes on to write ..

…the discussion of these matters is always about
cuts that will be borne by middle- and working-class people and almost
never about taxes on a class of Americans who’ve been having a
financial orgy for the last 30 years.

I see it the other way around. I see that very few people (Republicans or Democrats) are talking
about cutting services significantly (Paul Ryan, aside) or raising taxes on anybody in the
bottom 95 percentiles of the tax bracket (VAT rumors, aside) because that would be
considered politically unserious, or at least political suicide.
Look at Obama’s 2011 budget which cuts taxes for 95 percent of the
Americans and raises the top income rate. Look at the House, which in addition to the surtax, has fought the Senate’s efforts to impose
an excise tax on expensive insurance plans because they might hit middle
class families in the future.

To be sure, Tomasky is right that nobody is talking about returning the top marginal tax rate to 91 percent — even he rules that out — and his fundamental point is that Washington is skittish about drastically hiking up the top rate to as high as 50%. But Washington is skittishness about acting drastically about everything. No need for Tomasky to take offense on behalf of tax policy.

The US recovery continues to chug along in manufacturing, as factories are already adding jobs and reporting stronger demand. That’s good news for jobs, which appear poised for some kind of comeback. Matt Yglesias predicts the unemployment news is about to turn for the administration:

A big topic of discussion at yesterday’s White House meeting
had to do with who’s to blame for the fact that so few members of the
public recognize that ARRA is working. I think this is actually a
problem that’s going to turn around very soon …

It’s just
difficult, as a writer or an advocate, to convince people that ARRA is
creating jobs when everyone knows that there’s no net job growth. If
there’s no job growth, then what jobs are being created? Then you get
into counterfactuals and nobody is persuaded. But we’ll be into
positive territory very soon. Which means you won’t be able to ask
“where are the jobs?” The answer will be “the jobs are right here!”

I want Matt to be right. Any yet, the Council of Economic Advisers
expects unemployment in 2010 to average 10 percent and close the year
at 9.2 percent. But wait, you say, unemployment was only 9.7 percent in
January. How could the yearly average be higher?

The administration expects discouraged workers who left the labor force — and are not counted as officially unemployed — to come back when they see more jobs. (During the recovery, this group has equaled as much as 7 percent of the labor force.) Encouraged workers are good for the economy, but their re-entry in the labor market might look like bad news in the unemployment report. A larger labor force means a bigger denominator in the employment ratio, so even if the economy is creating more jobs than it’s shedding, the percent of Americans in the labor force who don’t have a job could stay the same or even grow.

Summing up: Jobs might be coming back. But the unemployment rate isn’t going down under 9 percent any time soon. Until that number looks like it’s plummeting, most Americans are unlikely to revise their opinion of the Recovery Act, or its impact on jobs.

While more fiscal stimulus is needed to juice the weak private sector, U.S. public debt is on pace to reach 100 percent of GDP in a little over a decade. At some point in the next five years, most analysts agree, we will need a serious debt reduction plan. What would an honest fiscal reform plan look like? Greg Mankiw draws up a five-step plan for conservative debt reform:

1. Substantial cuts in spending. Ensure that the
commission is as much about shrinking government as raising revenue. My
personal favorite would be to raise the age of eligibility for Social
Security and Medicare. Do it gradually but substantially. Then index it
to life expectancy, as it should have been from the beginning.

2. Increased use of Pigovian taxes. Candidate Obama pledged
100 percent auctions under any cap-and-trade bill, but President Obama
caved on this issue. He should renew his pledge as part of the fiscal
fix. A simpler carbon tax is even better.

3. Use of consumption taxes rather than income taxes. A VAT
is, as I have said, the best of a bunch of bad alternatives.
Conservatives hate the VAT, more for political than economic reasons.
They should be willing to swallow a VAT as long as they get enough
other things from the deal.

4. Cuts in the top personal income and corporate tax rates.
Make sure the VAT is big enough to fund reductions in the most
distortionary taxes around. Put the top individual and corporate tax
rate at, say, 25 percent.

5. Permanent elimination of the estate tax. It is gone right
now, but most people I know are not quite ready to die. Conservatives
hate the estate tax even more than they hate the idea of the VAT. If
the elimination of the estate tax was coupled with the addition of the
VAT, the entire deal might be more palatable to them.

Suggestions (4) and (5) will find few liberal friends, but (1), (2) and (3) would be perfectly acceptable to many self-described liberals in journalism and academia. And yet Mankiw writes:

The answer [to fiscal reform] for liberals is easy: They want to raise taxes to fund the
existing, and even an expanded, social safety net, while politically
insulating the Democrats as much as possible from the charge of being
the “tax and spend” party.

This is unfair.
I have not recently found any serious liberal policy thinkers who say
the only solution to the debt is to raise taxes ad infinitum to keep up with unreformed entitlement inflation. If I do find one, I promise to call him crazy.

Instead,
I’ve found people like John Podesta, president of the Center for
American Progress (liberal enough for ya?) who told a budget reform
conference on Tuesday that he supports: (1) a consumption tax like a
VAT; (2) Medicare cuts and reform on the delivery end to pull its
inflation curve down; (3) a goal to have a dollar of tax revenue
support each dollar of federal spending, not including interest on the
debt, by 2014, which could require (4) a freeze on certain parts of the
budget, including security programs like homeland security and defense.
That is a liberal plan to reduce the deficit, and it involves spending
cuts, entitlement reform and tax increases, on the consumption side.
The first three steps of the Mankiw plan involve … yep … spending cuts, entitlement reform,
and tax increases, on the consumption side.

On many issues, sensible conservative and liberal policy
thinkers say they “agree to disagree.” But on the broad outlines of fiscal reform, it’s like they disagree that they agree. Liberal writers can say “there are no conservatives for raising taxes!” and conservative writers can say “there are no liberals for reforming entitlements!” but saying so doesn’t make it so. The political prospect of budget reform is dismal. We all acknowledge that. But it’s increasingly clear to me that most good budget reform plans across the political spectrum share the same three pillars: spending cuts, entitlement reform, and tax increases, preferably on the consumption side.

So let’s start there.