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Wonkbook: A smarter deficit deal

By Ezra Klein,

JIM YOUNG REUTERS U.S. Speaker of the House John Boehner (2nd right) walks to the microphones to speak to the media after a meeting with U.S. President Barack Obama on the deficit and debt at the White House June 1. Inside the White House, there's talk of cutting payroll taxes on the employer side. Outside of it, liberals are making noises about attaching further tax cuts or stimulus to a debt-ceiling deal. That makes sense, given that unemployment remains above 9 percent. What doesn't make sense is that these are small ideas and, in the case of attaching stimulus to the debt ceiling, probably doomed ones. And though that's bad for Democrats and bad for the jobless, it's also a missed opportunity for Republicans.

As I argue in my Bloomberg View column this morning, Republicans who want more long-term deficit reduction and more spending cuts should see stimulus not as the enemy, but as leverage. If the deficit reduction negotiation is only and solely about deficit reduction, Democrats will be primarily interested in making the cuts more gradual and the tax increases more significant. With stimulus as one of the items in the deal, however, Democrats could agree to more total deficit reduction, and perhaps even more of it in spending cuts, than they would otherwise. Stimulus, in other words, is a deliverable that Democrats care about much more than Republicans do, which makes it perfect leverage for Republicans to negotiate concessions on the items they care about more than the Democrats do.

The president's deficit-reduction framework envisioned a 3:1 compromise: $3 of spending cuts for every $1 of tax increases (though his math on the tax side was really quite misleading, albeit in the direction of overstating his tax increases, not in the direction of obscuring them). Imagine if Republicans countered with a 4:1:1 offer: They would accept $1 of tax-side stimulus between now and 2012 for every $4 of spending cuts and $1 of tax increases between 2013 and 2022. In theory, the incentives of that deal should please everyone: the more stimulus there is, the more deficit reduction there is. Revenues become as small a part of the final bargain as is realistic. And yet, as far as anyone can tell, nothing like this is the table.

Five in the morning

1) The public is still wary of a debt deal, report Lori Montgomery and Jon Cohen: "A large majority of Americans say the U.S. economy would probably suffer serious harm if Congress fails to give the federal government more borrowing authority. But barely half support raising the government’s debt limit, even if lawmakers also sharply cut spending. A Washington Post-ABC News poll shows that 55 percent of Democrats and half of Republicans and independents support a debt-limit deal that includes a steep reduction in the size of government. But 37 percent of Republicans, a third of independents and nearly a fifth of Democrats say they are against raising the debt limit, under any circumstances. The survey highlights the political pressures facing lawmakers and the White House as they lurch toward Aug. 2, when the U.S. Treasury says it is likely to default on its obligations unless Congress agrees to raise the $14.3 trillion debt limit."

2) Retailers beat banks in a Senate swipe fee battle, report Ylan Mui and Cezary Podkul: "Banks lost a key battle on Capitol Hill on Wednesday to preserve billions of dollars in debit card fees, despite a lobbying blitzkrieg that tested the industry’s ability to move beyond the stigma of the financial crisis. A proposal by Sen. Jon Tester (D-Mont.) to delay and rewrite a law that curtails the fees merchants must pay to banks each time a debit card is swiped failed to win enough votes to move forward Wednesday. The bill was banks’ last hope for relief before the law takes effect next month, and they unleashed hundreds of thousands of dollars in political donations and dozens of lobbyists to drum up support...Swipe fees are part of the Dodd-Frank legislation that Congress passed last summer to overhaul the nation’s financial system and that the banking industry has tried to dismantle."

3) The Obama administration is considering an employer-side pay roll tax cut, report Mike Dorning and Hans Nichols: "President Barack Obama’s advisers have discussed seeking a temporary cut in the payroll taxes businesses pay on wages as they debate ways to spur hiring amid signs that the recovery is slowing, according to people familiar with the matter...In an analysis released shortly after the December 2010 tax-cut deal, Deutsche Bank Securities economists Joseph LaVorgna, Carl Riccadonna and Brett Ryan estimated that the employee payroll tax cut would boost gross domestic product this year by an additional 0.7 percentage points."

4) Liberals are pushing for a debt limit deal with short-term stimulus, reports Jackie Calmes: "On Thursday, for the first time in two weeks, Vice President Joseph R. Biden Jr. and six Congressional leaders will meet with a new urgency to take up negotiations toward reaching a deficit-reduction deal in July...The signs of an economic slowdown in past weeks -- not least Friday’s report showing weak job growth in May -- have altered the climate for those talks...Some Democrats, economists and financial market analysts are raising concerns that too much fiscal restraint this year and next could further undermine the recovery...Democrats and more liberal economists are suggesting that any long-term deficit reduction be paired with short-term spending increases or tax cuts to spur the economy...Mr. Obama stoked such speculation on Tuesday at a press conference alongside Chancellor Angela Merkel of Germany."

5) A third rating agency is threatening the US's Triple-A credit rating, report Carol Lee and Janet Hook: "A third rating agency threatened to downgrade the U.S. government's credit status if Congress failed to increase the nation's borrowing limit by early August, increasing pressure on lawmakers and the Obama administration to reach a deficit-reduction deal. Fitch Ratings said Wednesday it would put U.S. debt on watch for downgrade in early August in the event that Congress failed to lift the debt ceiling before other measures aimed at avoiding default are exhausted. The notice follows similar warnings in recent weeks from Moody's Investors Service and Standard & Poor's. The Treasury says Congress must raise the $14.3 trillion debt limit by Aug. 2, the day stopgap measures will have run their course."

Country interlude: Neko Case plays "This Tornado Loves You" on Late Show with David Letterman.

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

Still to come: Agencies have split over how much money banks should stock up; an appeals court heard arguments on health care reform; there are now more high-skilled than low-skilled immigrants; Mitt Romney's belief in global warming is hurting him; and a beaver meets a skunk, reacts appropriately.


Agencies are split on bank capital requirements, report Deborah Solomon and Randall Smith: "U.S. regulators aim to propose higher capital standards for financial firms in late July but remain divided over how much money banks and other firms should hold to protect against potential losses. The Federal Reserve, Treasury Department and many international policy makers agree that large financial institutions that pose risk to the global financial system should have bigger capital cushions. But policy makers are split over just how much capital is necessary...People familiar with the discussions say the Fed is likely to support a buffer of about 10%--or another 3% on top of the 7% agreed to last year by global policy makers in Basel, Switzerland...That 3% is slightly higher than the U.S. Treasury--and some international policy makers--currently support, government officials say."

The Gang of Five is flailing, reports Erik Wasson: "The five remaining members of the Senate’s erstwhile Gang of Six deficit negotiators are struggling to stay relevant and pleading with Sen. Tom Coburn (R-Okla.) to rejoin the group...Sen. Kent Conrad (D-N.D.), another of the Senate 'five guys' still talking, said Chambliss and Sen. Mike Crapo (Idaho), the two Republicans, continue to resist producing a plan unless Coburn returns. He said he has not heard of plans to replace Coburn. Sen. Mark Warner (D-Va.) hinted that Coburn could be replaced if he continues to resist and if the plan attracts strong enough bipartisan support. 'I hope he comes back, too, but we’ve also got lots of other members in both parties that are encouraging us,' he said."

Germany is playing hardball about bailing out Greece, reports Howard Schneider: "German officials are demanding that private investors contribute a 'substantial' amount toward any new bailout of Greece and warned that the country faces an 'unorderly default' within weeks if an agreement is not reached. The demand, conveyed to European and International Monetary Fund officials in a letter this week from German finance minister Wolfgang Schauble, came as negotiations over Greece reach a do-or-die stage. Amid a renewed sense of crisis, IMF and European officials are discussing how to revise and expand aid to Greece. They hope to complete a new program at summit meetings beginning June 20. The country may need more than $100 billion for a new three-year program, including roughly $40 billion to pay bonds coming due in the next year and a half."

An Elizabeth Warren deputy may head the consumer bureau, report Ylan Mui and Zachary Goldfarb: "The White House is considering naming a senior staffer at the Consumer Financial Protection Bureau to lead the agency as the deadline for its launch draws near, according to a person familiar with the discussions. Raj Date joined the bureau in February as associate director of research, markets and regulations, overseeing its work on key issues such as credit cards and mortgages...Bloomberg first reported the news...His financial credentials could fend off questions of whether someone such as Warren who has never worked in the industry could fairly regulate it. But Date also has a track record of consumer advocacy that should appease Democrats. He left the banking industry in 2009 to start a nonprofit think tank devoted to promoting regulation of financial firms. He has criticized the big paychecks of Wall Street executives and supported the creation of the bureau, even calling on the White House to broaden its authority. “The fact is that most regulators are, recent experience would suggest, dreadful when it comes to consumer protection,” Date wrote in 2009."

My column: A 3:1:1 compromise could be our best bet: "Imagine a 3:1:1 compromise. For every three dollars in spending cuts between 2013 and 2022, there would be one dollar in tax increases, along with one dollar in stimulus prior to 2013. If Republicans were willing to be flexible on the precise nature of the spending cuts, I bet they could get Democrats to accept a 4:1:1 ratio of even deeper cuts. A commitment to stimulus would lure liberals to support the spending cuts in the deal, helping a bill pass Congress while neutering the 2012 campaign attacks that Democrats will otherwise wage against the cuts in the House Republican budget...In ordinary times, a policy deal like this would never happen. But with 15 million unemployed Americans and with extremely low interest rates on federal debt, these times are far from ordinary."

The Bush tax cuts failed in every way, writes Annie Lowrey: "[Bush] vowed: 'Tax relief will create new jobs. Tax relief will generate new wealth. And tax relief will open new opportunities.'...During the 2001 to 2007 business cycle, America's economy enjoyed 52 straight months of job growth. But it was sluggish--in fact, the slowest rate of jobs growth on record since World War II, and just one-fifth the pace of the 1990s Then there's wealth. Put simply, the aughts were a decade of income stagnation: The tax cuts failed to bolster most taxpayers' earnings, even before the recession hit...Did the cuts 'open new opportunities'? It's a vague phrase, but one way to measure it is to look at job growth--and there's nothing to see there. Another way would be to say that the cuts benefited 'job creators'...But the number of private-sector jobs created by young companies fell during the Bush administration."

Guess what? Tim Pawlenty's economic plan promises to bring unemployment down to -- wait for it -- negative-one percent. "Alan Blinder, a former vice chairman of the Federal Reserve, ran the numbers for me. 'Trend growth is three percent or so,” he wrote in an e-mail. “Five percent growth would be two percentage points higher, which should cut the unemployment rate by about one percentage point per year. So after 10 years, it will have fallen from nine percent to minus-one percent. Nice trick!' Paul Ryan was (rightly) mocked for releasing his budget alongside projections that said it would drive unemployment down to 2.8 percent. But compared with Pawlenty’s promise, Ryan was being downright pessimistic. What does minus-one percent unemployment even look like? Is it a function of everyone having a job, and then a few people having second jobs? Perhaps it relates to ghosts or robots? It’s hard to say."

A national infrastructure bank is stimulus everyone should love, writes Fareed Zakaria: "Washington needs to find ways to employ the millions of workers whose jobs disappeared with the housing bust. The simplest way to help them, and the country, would be to create a national infrastructure bank to repair and rebuild America’s infrastructure -- which is in a shambles and ranks 23rd globally, according to the World Economic Forum -- down from sixth only a decade ago. House Majority Leader Eric Cantor has played down this proposal as just more stimulus, but if Republicans set aside ideology they would see it is actually an opportunity to push for two of their favorite ideas: privatization and the elimination of earmarks. The United States builds infrastructure in a remarkably socialist manner; the government funds, builds and operates almost all American infrastructure."

Animals: they're just like us! interlude: A beaver find a skunk, reacts with disgust.

Health Care

States and the Feds duked it out over health care before an appeals court yesterday, reports N.C. Aizenman: "Lawyers for the 26 states challenging the constitutionality of the nation’s new health-care law squared off against the Obama administration in an appeals court in Atlanta on Wednesday, where a panel of three judges asked tough questions of both sides. One judge, Frank M. Hull, appeared more sympathetic to the law -- at one point interrupting an attorney for the states to tell him that his central argument 'doesn’t get me very far.' Nonetheless, the case before the U.S. Court of Appeals for the 11th Circuit could offer the armada of Republican state leaders who have taken on the law their best chance of a win during stage two of a multi-pronged, protracted legal battle widely expected to end in the Supreme Court."

The White House is firing back at claims that employers will drop insurance due to health care reform, reports Brian Beutler: "Republicans have seized on a new study to argue that health care reform will harm workers, and that's put the White House on the defensive. One of the key political planks of President Obama's universal health care push was the claim that his reforms would allow people who are happy with their current benefits to keep them. The argument was never completely true. In the pre-reform era, employees have been at their employers' whims, unable to count on their benefits remaining unchanged. And come 2014, when the law is fully implemented, the reforms themselves will mean some employees are nudged into different insurance policies. But the law was designed to minimize this sort of turbulence."

Medicare Part D does not prove RyanCare will work: "Ryan didn’t says that the program’s costs are low. He said that they’re below expectations and implied that that’s the same thing. But it’s not. If only 50 percent of seniors sign up, costs will be very low against projections, but that doesn’t mean premiums aren’t growing at 20 percent a year. The system’s costs can be low even as cost growth is high. And so too for Part D. Since 2006 — the first year of the benefit — Medicare Part D’s average premium has risen by 57 percent (pdf). Between 2010 and 2011, premiums rose by 10 percent. And going forward, the program’s actuaries expect (pdf) expenditures “to grow at an average annual rate of 9.7 percent for the 10-year period 2011 to 2020.” That may be an excellent performance when compared with the Congressional Budget Office’s initial projections. But it’s a lot faster than inflation, which is what Ryan needs for his plan to work."

Domestic Policy

There are now more high-skilled than low-skilled immigrants in the US, reports Tara Bahrampour: "Highly skilled temporary and permanent immigrants in the United States now outnumber lower-skilled ones, marking a dramatic shift in the foreign-born workforce that could have profound political and economic implications in the national debate over immigration. This shift in America’s immigration population, based on census data, is summarized in a report released Thursday by the Brookings Institution. It found that 30 percent of the country’s working-age immigrants, regardless of legal status, have at least a bachelor’s degree, while 28 percent lack a high school diploma. The shift had been in the works for the past three decades, a period that has seen a dramatic increase in the population born outside the United States."

The FCC is killing the Fairness Doctrine, reports Cecilia Kang: "The chairman of the Federal Communications Commission said he will strike the Fairness Doctrine, a rule that requires broadcasters to present opposing views of controversial issues. In a letter to the chairman of the House Commerce Committee, FCC Chairman Julius Genachowski wrote that the 1949 rule 'holds the potential to chill free speech and the free flow of ideas.' Genachowski’s letter was disclosed Wednesday by Rep. Fred Upton (R-Mich.), who said in a news release that he has asked the FCC chairman for details on when the rule would be scrapped. The FCC chair has promised to remove the rules on numerous occasions, including his confirmation hearings in 2009."

Congress may kill "super Wi-Fi", reports Eliza Krigman: "The Federal Communications Commission’s ballyhooed plan to provide a new source of wireless airwaves for a 'super Wi-Fi' network could become a casualty of two initiatives pending in Congress: one to build a new communications system for public safety agencies and another to auction off wireless spectrum to the private sector. The FCC voted in the fall to allow companies such as Microsoft, Google and Intel to build new devices that can surf the Web using idle TV spectrum known as 'white spaces.' Proponents of white spaces have been lobbying the commission to create such a network for the better part of a decade. But now the hopes of the agency, and the companies that support the plan, could be dashed as Congress works to repurpose spectrum for mobile broadband and raise revenue to reduce the deficit."

Adorable animals being lugubrious interlude: Cute sad kitten is cute, sad.


Mitt Romney's belief in global warming could prove fatal, report Philip Rucker and Peter Wallsten: "It seemed like a straightforward question on a second-tier issue: Would Mitt Romney disavow the science behind global warming? The putative Republican presidential front-runner, eager to prove his conservative bona fides, could easily have said what he knew many in his party’s base wanted to hear. Instead, the former Massachusetts governor stuck to the position he has held for many years -- that he believes the world is getting warmer and that humans are contributing to that pattern...So far, Romney’s reviews from the right are not positive. His views about climate change in particular put him at odds with many in his party’s base."

OPEC won't boost oil production, reports Steven Mufson: "The Organization of the Petroleum Exporting Countries meeting ended in stalemate Wednesday, after failing to ratify a proposal by four Persian Gulf nations to boost the cartel’s output in the face of high crude oil prices. Saudi Arabia and three other countries proposed raising output by 1.5 million barrels a day, less than the amount OPEC itself said in a May report would be needed to meet higher demand as the summer driving season arrives. But other nations said that the world market has enough oil, even with the loss of Libya’s 1.2 million to 1.5 million barrels a day of exports. 'The world remains well-supplied with oil, with ample spare capacity and adequate stock levels,' Mohammad Aliabadi, Iran’s acting petroleum minister said in his prepared opening statement as president of the OPEC session."

The US is falling behind on green energy, reports Elisabeth Rosenthal: "With Congress deeply divided over whether climate change is real or if the country should use less fossil fuel, efforts in the United States have paled in comparison. That slow start is ceding job growth and profits to companies overseas that now profitably export their goods and expertise to the United States. A recent report by the Pew Charitable Trusts found that while the clean technology sector was booming in Europe, Asia and Latin America, its competitive position was 'at risk' in the United States because of 'uncertainties surrounding key policies and incentives.' 'This is a $5 trillion business and if we fail to be serious players in the new energy economy, the costs will be staggering to this country,' said Hal Harvey, a Stanford engineer who was an adviser to both the Clinton and the first Bush administration."

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

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