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Here’s a good NBC nightly news segment on the deficit problem that is a lot like a mini-version of IOUSA the movie. My boss Bob Bixby is in it.

(Photo from HuffingtonPost)

So, I’ve been pretty much paralyzed with this snowstorm (”Snowmageddon” as they’ve dubbed it) here in DC.  We have a couple feet of snow on the ground!  It’s made it difficult for me to keep up any of my normal routine either as economist or mom, in fact, so I haven’t blogged since before the first flakes fell.  But with everything including my work place, my kids’ schools and the federal government closed today, no Economic Report of the President released yet (I think it was supposed to come out this week, maybe even today), and not much to do other than wait for the snow to thaw (but you know, we have another round of snow coming tomorrow?!), I thought I’d attempt this little post relating this weekend’s storm to the fiscal policy issues I manage to obsess about even in the middle of something as distracting as all this snow.

On Saturday I witnessed this amazing mass snowball fight in Dupont Circle (pictured above)–here are Washington Post and Huffington Post stories and videos on it.  It sort of reminded me of how well bipartisanship is going these days on Capitol Hill, especially when it comes to coming together on fiscal responsibility…

We have the House Republican Leader, John Boehner, arguing that the President’s notion of a bipartisan fiscal commission would actually be a “partisan” commission, mainly because it would allow revenue increases to be put on the table (emphasis added):

The commission proposed by President Obama would reportedly be barred from proposing cuts to any discretionary spending, which accounts for more than one-third of all federal spending.  With discretionary spending off the table, tax increases would represent a very large portion of the policy options for decreasing deficits.  By seeking to take the ‘comprehensive’ route on every issue except spending, the Obama Administration only reveals its unwillingness to end Washington Democrats’ spending binge.

Of course, unlike mandatory spending, discretionary spending is subject to annual review through the appropriations process and can be constrained through the use of spending caps.  If the Administration really were unwilling to tackle the growth in government spending, they would have taken the big mandatory spending programs (Medicare, Medicaid and Social Security) off the table, but they didn’t–even with some pressure from the more liberal parts of their party to do just that.

House Majority Leader Steny Hoyer responded to the Boehner statement with this (emphasis added):

I’m disappointed in Minority Leader Boehner’s response to a sincere attempt to establish a bipartisan mechanism to address the fiscal challenges facing our nation.  The Obama Administration has made fiscal responsibility a focus over both the short- and long-term. Their budget proposal included several immediate steps, such as the freeze on non-defense discretionary spending and a Financial Crisis Responsibility Fee to ensure taxpayers are repaid.  Additionally, the President will sign statutory ‘pay-as-you-go’ legislation into law soon, reinstating a proven tool for bringing discipline to the budget process.

Over the long-term, a bipartisan fiscal commission is key to setting a path toward sustained fiscal discipline.  The Administration has repeatedly indicated its openness to constructive suggestions on how a commission should be structured, as evidenced by Secretary Geithner’s outreach to Minority Leader Boehner.   I regret that Leader Boehner rejected the Administration’s overture asking for input…

I agree that all options for restoring fiscal balance should be on the table for the commission to consider.  However, budget experts from across the political spectrum agree that finding a solution to our long term fiscal challenges requires focusing on tough choices with regard to entitlement spending and revenues. Regardless of how discretionary spending is handled, the proposed freeze for the next fiscal year is a strong action.

Many Republicans say a tax cut would spur growth and revenue. Mr. Obama suggested it would cost revenue and drive up the deficit. “I’m going to want to take a look at your math, and see how that works,” he said.

TAPPER: Do you think the fact that you guys are pushing the bipartisan commission is indicative of the fact that our political system is not capable of taking on the serious challenges our nation faces?  You and I know that the money, as Willie Sutton says, said, that — why do you rob banks? Because that’s where the money is. The money is in entitlement programs, Medicare, Medicaid, Social Security, things that you do not touch in this budget. The fact that you need a bipartisan commission to recommend cuts or tax increases, doesn’t that indicate that our political system is incapable of making these tough decisions?

GEITHNER: Jake, I am very confident in our ability as a country to bring people together and make sure we are solving these challenges and these problems. We’ve done it in the past. It is completely within our capacity to do as a country. But of course it requires you bringing people together across the aisle to step back from politics, to try to bring practical solutions to things that are very important to our future as a country. And the president is committed to do that. And we’re going to give the Republican Party the chance to share in the responsibility and the burden and the privilege of trying to fix the things that were broken in this country.

TAPPER: Republicans are afraid this is just a back door for tax increases. Are you willing to say that tax increases are off the table for this commission, let’s sit down and talk about the long-term structural problems with entitlement spending?

GEITHNER: The president’s view — and this is a view shared by many Republicans, and it builds on what we’ve seen with effective commissions in the past, like the Greenspan commission that President Reagan established to help restore the financial footing of Social Security — is that, for this to work, you’ve got to bring people together to step back from politics, day-to-day politics, and to bring fresh ideas to solve these kind of problems. That’s the only way to do it, we think, and we’re committed to doing that. We’ve got to do it on a bipartisan basis, and we’re deeply serious about doing this.

That’s why right now I feel a lot like Jonathan Chait does in his New Republic column from a week ago entitled “The Impossibility of Fiscal Responsibility.” Jonathan argues that fiscal responsibility is impossible because the Republicans aren’t cooperating or even “engaging” (not even in a chaotic snowball fighting kind of way), and that:

[I]t’s very hard for one party to reduce the deficit by itself. I wouldn’t say that the entire Democratic Party is committed to serious deficit reduction. But major elements are, and nearly the whole party is committed to at least not making the problem worse. But a unilateral commitment to fiscal responsibility is a huge political handicap…

The more Democrats do to reduce the deficit, the easier they make it politically for Republicans to retake power, and the easier they make it fiscally for Republicans to wreck the budget when they do. So, why try?

So, because right now there’s no evidence that current Republicans in Congress will budge an inch on the issue of taxes, and at the same time little evidence that the Administration yet has the courage to take the lead with their own party on taxes (and saying very plainly that they must come up, eventually), today I look at all the snow around me feeling “stuck” and can’t help thinking that “bipartisan fiscal responsibility” has about a snowball’s chance in hell.

With the successful but one-sided vote in the House, Congress passed a version of statutory pay-as-you-go budget rules today.  It’s not an ideal version of PAYGO, because it allows very costly policies to be exempted.  The fact that the bulk of these exempted tax policies are the Bush tax cuts, makes it all the more surprising (based on principle alone) that not a single House Republican supported it.  In the Washington Post, Lori Montgomery explains:

The budget that Obama laid out this week would add $8.5 trillion to the debt by 2020, some of it explicitly permitted under the new PAYGO rules. For example, the rules allow Obama to extend tax breaks for the middle class enacted during the George W. Bush administration without covering the cost. Over the next decade, that extension would add $1.3 trillion to the debt by Democratic estimates or as much as $1.9 trillion according to Republicans.

The rules also permit lawmakers to protect taxpayers from the expansion of the alternative minimum tax for two years, lower the estate tax for two years and protect doctors who serve Medicare patients from a scheduled pay cut through 2014.

OK–so it’s not perfect, but a weak PAYGO is still probably better than no PAYGO.  Today, the Concord Coalition issued this policy statement supporting even this imperfect version, explaining why the exemptions in the PAYGO rule make it all the more important that other tools of fiscal discipline (including those proposed by the Obama Administration in their budget) serve complementary roles:

Regardless of political reality, the economic reality remains the same. Persistent deficits of the size now projected under the President’s budget would harm the economy, increase our reliance on foreign borrowing, crowd out domestic investments, and lead to a spike in interest costs. Thus, if statutory PAYGO is adopted in the form currently proposed, policymakers must acknowledge the economic consequences of its exemptions and be prepared to deal with them. The cost of these policies will not go away simply because they are exempted from PAYGO. If not paid for now, they will be paid for later at a higher cost in interest payments and a less robust economy. That is why a fiscal commission with a broad mandate to tackle the structural deficit is a logical complement to PAYGO. Moreover, exempting any existing policies from PAYGO does not enact them into law. Legislation must still pass to extend these policies and those who advocate strict compliance with PAYGO can, and should, uphold this principle by voting against any extensions that are not paid for.

Finding a cure for the nation’s dire fiscal outlook will obviously require a lot more than a new budget rule, but enactment of statutory PAYGO would send a very positive signal that the federal government is beginning to take the problem seriously…

The Concord Coalition supports statutory PAYGO and believes that it must be assessed for what it is, not for what it isn’t. PAYGO is not a deficit reduction tool. It is not a spending freeze. It does not apply to discretionary spending or automatic increases in entitlement programs and tax expenditures. Holding PAYGO to a standard that assumes it is intended to do all these things (reduce the deficit, freeze spending, control “pork barrel” appropriations or rein in entitlements) sets up a conclusion that the rule would do no good. That is a false standard. PAYGO’s real value comes from its deterrent effect on entitlement expansions and tax cuts that would widen our structural deficit. This is certainly worth doing, even if other things are left to be done.

It’s basically what I was trying to say in this CNN-Money “panel” on what the President “got right” and “got wrong” in his budget–even though it might seem that my “wrongs” (and my worries) outnumber the “rights.”  I feel that the spirit and intent of the legislation (”in theory”) is often good, even if the execution (”in practice”) is far from flawless.

Bob (see ABC News video above):  Because the “trickle” of red ink has turned into a “flood”–and neither political party is doing enough to stem it.

Dave (from Politics Daily interview): Because it’s like a “super subprime” crisis that “mortgages the future” of our children and grandchildren.

Peter (a la the Washington Post’s Dana Milbank):  Because it’s “sexy”?…

Readers may be confused: is my (still developing) assessment of the Obama budget a net positive one, or not? Well, YES. Being the optimist I am, my “view” is that this budget glass is “half full.”  But it’s only (at best) half full.  That’s because from my perspective as a fiscal hawk, while the Obama budget qualitatively calls for a set of good fiscal discipline tools (statutory PAYGO, discretionary spending constraints, some decrease in inefficient tax expenditures, a fiscal commission, and health care reform) that have some potential to make a difference, it still fails to go far enough quantitatively with specific plans that would actually fill in–versus open up–the fiscal gap.  The failure to “follow through” in filling at least the ten-year budget glass, has mostly to do with the Administration’s unwillingness to make the necessary changes in tax policy–or even to talk about the possibility of such changes with the American public.

When I first look at the President’s budget, I avoid reading press stories on it and even the introductory words in the budget itself and instead go straight to the summary tables.  I figure sticking to the plain numbers and the few descriptive explanatory words in the rows of the tables will help me take in my first view of the budget without seeing it through either the clouded lenses of other budget analysts or the rose-colored lenses of the Administration.  But in this year’s budget, even the summary tables have a lot of art and spin to them.  In fact, there are so many ways of labeling and spinning the numbers–and the Administration demonstrates this well just in their tables–that it makes one dizzy and confused.

So here are some of my quick and fascinating details from the Obama budget, obtained from my perusal of just the summary tables alone.

In my mind, the place to start is Table S-7, the “bridge from budget enforcement act baseline to baseline projection of current policy”–because if you don’t start there, you won’t understand where the Obama Administration is starting from in proposing their budget policies.  Some of what you learn from that table:

• The ten-year (FY2011-20) budget deficit under current law (i.e., if Congress and the Administration passed no new tax or spending policies over the next ten years) is $5.472 trillion.
• Yet the Administration claims it is starting from a ten-year deficit that’s nearly double that: $10.640 trillion.  That’s because the Administration first adds in the cost of permanently extending (and fully deficit-financing) the following:  permanent relief from the alternative minimum tax ($659 billion), permanent extension of all of the 2001 and 2003 tax cuts ($3.097 trillion), and the “doc fix” to override scheduled reductions in Medicare physician payments ($371 billion).  Note: that’s $3.8 trillion worth of added deficits due to the assumed permanent extension of the tax cuts (AMT and Bush tax cuts) alone.

Then you can go to Tables S-1 (budget totals) and S-2 (effect of budget proposals on projected deficits) to understand how the policies proposed by the Obama Administration affect the deficit outlook.

• Table S-2 suggests that a substantial amount of deficit reduction is achieved through increased revenues, because it shows $749 billion in additional revenue from “other revenue changes” (various tax increases on businesses I’ll detail further below) and $678 billion from letting the upper-income tax provisions in the Bush tax cuts expire.  Relative to the policy-extended starting point chosen by the Administration, this implies that tax policy provides around $1.5 trillion in deficit reduction out of the $2.1 trillion total deficit reduction shown.  (And yet interestingly, nowhere in this table does the phrase “tax increase” or even “revenue increase” appear; tax increases are labeled “changes” or “provisions”, while tax decreases are (more clearly) labeled as “cuts.”)
• But the starting point for Table S-2 is the $10.6 trillion ten-year deficit under the policy extended baseline.  If you keep track from the current-law baseline (and its $5.5 trillion, ten-year deficit), the tax increases proposed in the Obama budget merely bring the net tax cuts in the Obama budget down from $3.8 trillion to around $2.6 trillion.  That’s a net tax cut relative to current law, of $2.6 trillion.
• So Table S-1 shows that the Obama budget brings the ten-year deficit “down” to $8.5 trillion relative to the $10.6 trillion policy-extended baseline–a decrease of more than $2 trillion–while it actually brings the deficit “up” by more than $3 trillion relative to current law.

Confused?  Of course.  That’s exactly what these different baselines and poor labels are designed to encourage.  But let’s go on…

• That opening table (Table S-1) in the summary tables section has an unusual amount of words in it, because it contains a box describing the fiscal commission, designed to reassure us that ultimately the Administration’s policies will get deficits down to a truly sustainable level–below the 3.9 percent of GDP shown in 2015 under the budget “without fiscal commission.”  It’s not exactly a glossary to help you identify the tax increases versus decreases, because the Administration sticks to its self-imposed rule of never uttering the words “higher” or “increase” next to the word “taxes.”  We can read of the goals of “balancing the budget” and “stabiliz[ing] the debt-to-GDP ratio” and “examin[ing] policies to meaningfully improve the long-run fiscal outlook”.  And we can even be warned of necessary “changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures.”  But to explicitly suggest that “tax increases” might be part of the strategy to reduce that gap?  Never!

• The Obama budget does not in fact propose any overall increase in taxes.  If you look at the levels of revenue and spending in Table S-1 and compare with the CBO current-law baseline, you’ll see revenues in 2015 that are 0.8 percent of GDP lower than under current law, and spending that’s 0.6 percent of GDP higher–producing deficits under the Obama proposals in 2015 that are 1.3 percent of GDP higher than CBO shows for current law.

Next, make  your way down to Table S-8, showing “mandatory and receipt proposals.”  Again, with few words in these tables, the Administration manages to speak volumes about their fiscal policy and public relations strategies.  I’ve looked at the way they sort out and label their tax policies and notice the following:  First, any tax increases are never labeled such, and they always hit those who fall under one (or more) of these three categories: (i) bad corporations, (ii) tax cheats (or those who otherwise engage in tax waste, fraud and abuse), and (iii) rich people.  Second, any tax decreases are clearly (and proudly) labeled “tax cuts” and are for good things and people–such as for “recovery” and “families and individuals” and “small businesses.”

Using such labels, here’s how the bulk of the Administration’s proposed tax policies (apart from extension of the Bush tax cuts and AMT relief) break down–all relative to the Administration’s current-policy-extended baseline.  First, under the “happy tax cuts” category:

• “Tax Cuts” that are part of the “Temporary Recovery Measures”:  $47.3 billion;
• (Permanent) “Tax Cuts for Families and Individuals”: $143.4 billion;
• (Permanent) “Tax Cuts for [small, main-street-type] Businesses”: $93.5 billion; and
• “Continue certain expiring provisions through calendar year 2011″ [too diverse a group of provisions to come up with one happy label for or otherwise justify]:  $46.7 billion.

Then, under the “tax the evil ones” (but, shhhh… don’t call them “tax increases”) category:

• the “financial crisis responsibility fee” (aka tax on “bad Wall Street firms”): $90.0 billion;
• other tax increases that “reform treatment of financial institutions”: $3.3 billion;
• “Reinstate Superfund taxes” (aka tax on polluters): $18.9 billion;
• “Reform U.S. international tax system” (aka tax on multinational corps): $122.2 billion;
• “Eliminate fossil fuel tax preferences” (aka tax on big oil polluters): $38.8 billion;
• “Tax carried interest as ordinary income” (another tax on Wall Street): $24.0 billion;
• “Reduce the tax gap” (aka get rid of “waste, fraud, and abuse” in the tax system and go after “tax cheats”): $49.4 billion;
• “Reform treatment of insurance institutions” (aka tax on evil insurance companies);
• “Upper-income provisions devoted to deficit reduction” - Bush tax cuts portion (aka, taxes on the rich–but the irony of the “deficit reduction” label being it can’t be counted as reducing the deficit for PAYGO purposes because these tax increases are already counted in current law): $678.3 billion; and
• Limit on itemized deductions to 28 percent (another tax on the rich–quickly and soundly rejected by Congress when proposed last year as a way to fund health reform): $291.2 billion.

So the reason I think the Obama budget only fills the glass (or the bill) halfway at most is because there’s a lot left to be desired in terms of tax policy, which I continue to insist has got to be most of the strategy to get deficits down to sustainable levels within the ten-year budget window.  Still don’t believe me?  Just read Len Burman’s column in today’s Washington Post, where he explains how much further we would get if we froze tax expenditures instead of discretionary spending.  Or read Joann Weiner’s column over on Politics Daily (Joann being another tax policy expert) where she explains how the Obama budget really only tinkers around with tax policy and seems to contain many “self-inflicted wounds.”

The Administration’s fiscal commission will have a chance to recommend how to follow through on good intentions and more adequately “fill up” the budget, and we can expect that more fundamental tax reform and increased revenue (yes, “higher taxes”!) will have to “come out” as a big part of the solution.

The Obama Administration released their FY2011 budget proposals on Monday morning.  I’ll be analyzing it further over the rest of this week, but in listening to the President’s remarks about it (video above) and from my initial read on how the whole budget is being pitched to the American public, it strikes me that the Administration is playing a very delicate “balancing act”–pun intended.

On the one hand, the Administration wants to appear sufficiently concerned about the short-term economy by proposing deficit-financed stimulus spending and tax cuts.  On the other hand, they want to appear sufficiently committed to fiscal responsibility and the idea that the government will get back to living within its means once the economy has recovered.  These are not inconsistent fiscal policy goals to be pursuing (even simultaneously), and in fact, concentrating on stimulus or deficit reduction alone would pose greater risk to the economy.  But it is still a challenge to find the optimal balance between these goals.

And on the one hand, the Obama Administration likes to blame the Bush Administration for the deficits they inherited.  But on the other hand, the Obama Administration continues to propose not only the extension of Bush policies in their own budget, but the deficit-financed extension of Bush policies in their own budget.  So they are choosing to continue the very behavior they have condemned, instead of coming up with their own (and better) behavior.  This is another delicate balancing act in terms of the “selling” of the Obama budget to the American people as something “new and improved” from the supposedly-awful Bush budgets of the past.

Related to both of these “balancing acts,” I worry that with all the Obama Administration’s recent emphasis on small business tax cuts as promoting “Main Street”-type business (versus evil “Wall Street”-type business), that pretty soon the Obama Administration will be convinced (by the Republicans with whom they’re trying to reach out to in the spirit of bipartisanship) that they can’t even let the upper-income Bush tax cuts expire, because those rich individual taxpayers became rich from their small businesses.  Might all of the “fiscally irresponsible and economically ineffective Bush tax cuts” become the “economically responsible and fiscally harmless Obama tax cuts” in the end?

So here’s how budget director Peter Orszag blogged about the budget on Monday morning.  In terms of the fiscal responsibility goal, Peter laid out the Administration’s strategy as involving four key elements.  I’m for all these ideas in principle, and I’m glad to see them in the Obama budget.  But I’m worried about how they’ll work out in practice.

1. Reinstate the statutory pay-as-you-go rules to avoid new commitments to deficit-financed spending. Peter explains that such rules worked during the Clinton Administration and that:  “PAYGO forces us to live by a simple but important principle:  Congress can only spend a dollar on an entitlement increase or tax cut if it saves a dollar elsewhere.”  The problem is that the Administration’s concept of PAYGO (and embraced by Congress, albeit only in “unipartisan” manner) exempts over $3 trillion worth of (what would have to be newly enacted) policies, according to the Administration’s own numbers in Table S-7 of their budget; these exempted policies include AMT relief, extension of the bulk of the Bush tax cuts, and the Medicare “doc fix” (to avoid scheduled cuts to physician payments).  While the Administration isn’t proposing to extend all of the Bush tax cuts, they do propose to extend and deficit finance and exempt from PAYGO about $2.4 trillion out of the $3.1 trillion ten-year cost for the full complement.
2. A “non-security” three-year discretionary spending freeze and some tax increases (on the rich and on fossil fuels) to get part of the way toward a sustainable budget deficit within the ten-year budget window. As Peter explains, these proposals could theoretically get deficits down to about 4 percent of GDP (vs 5 percent without them) by 2015.  But realistically and relative to current law, there’s just not much to grab onto here.  The spending “freeze” is not an across-the-board freeze, but more a bottom-line freeze–and is expected to save $250 billion (over ten years).  Of the tax increases Peter mentions, the largest (worth nearly $700 billion) would not reduce the deficit relative to current law because they are the high-income portions of the already-scheduled-to-expire Bush tax cuts, and the second largest (worth nearly $300 billion) is for the provision to limit itemized deductions–the proposal that Congress immediately rejected when the Administration presented it in last year’s budget.  (That this year it’s not being proposed as a way of funding health care reform isn’t going to make any difference.)  The proposals to reduce tax expenditures currently given to fossil fuels industries makes good policy sense (for both economic and environmental reasons), but these provisions would raise only less than $40 billion over ten years.
3. A presidentially-appointed, bipartisan fiscal commission to get the rest of the way there. Peter explains that getting deficits down to 4 percent of GDP based on steps 1 & 2 above isn’t good enough to get to “sustainable”–that a commission will have to figure out the policies to get us the rest of the way down to 3-percent-of-GDP deficits.  The goal according to Peter? (emphasis added):  “to look at a range of proposals and put forward a bipartisan recommendation to balance the budget excluding interest payments on the debt by 2015.”  I think the first goal of the commission ought to be to help the President utter the phrase “higher taxes” (or at least “revenue enhancements”?) so that the tough choices can begin to be discussed in an open manner.  Whether telling it like it is about the need for everything (tax increases and spending cuts) to be on the table would be consistent with the goal of forming a truly bipartisan commission remains to be seen.  After all, the President needs to appoint this bipartisan commission because Congress can’t even agree in a bipartisan manner on the formation of such a commission–let alone on the tough choices the commission would consider and recommend.
4. Enact health care reform for longer-term sustainability. (Well, we’ve seen how easy this part is…)  Peter’s always been right that it will be absolutely essential that we start “bending” the health care cost curve as soon as possible if we hope to achieve fiscal sustainability well beyond the ten-year budget window.  But this–and in fact entitlement reform more generally–has little to do with the goal of getting the deficit down to 3 percent of GDP by 2015.

So there is a lot for the Obama Administration to juggle and “balance” in this budget, in terms of the short-term versus longer-term economic goals, the continuation of Bush policies versus the fresh start of Obama policies, and speaking the easy “happy talk” versus telling it like it is about the necessary hard choices.  It will take courageous and forceful leadership on the part of President Obama to get this right.  Good intentions and ideas aren’t going to be enough.

(In response to the release of the budget, the Concord Coalition released this initial statement and posted these further observations on the “Tabulation” blog on Monday.)

Taking a little break with my oldest kid, Allie, this weekend–a combo belated 18th birthday and early graduation present. She’s been through a really busy and stressful few months with all of her college applications and finishing the last grading period that will really matter–with the self-imposed pressure to keep up perfection. Me?  I’m just “free-riding” by being her mom, and just getting started with the busiest season in my work–budget season… So what the heck, maybe this will put me in a good, laid-back frame of mind so I don’t just totally give up on hopes for fiscal responsibility in Washington. I come to you from Jamaica today, where “mon” means (from the “speak Jamaican glossary”):

Perhaps the single most important Jamaican word, “Mon” can represent every person in Jamaica—man, woman, and child. Yes mon! (Yes man, woman, or child!)

…So yes, “moN” can refer to a “moM”! 

I’ll still be here for half a day on Monday when the Administration’s budget comes out–and believe it or not, will be perusing its pages from my laptop on the beach before we pack up to head home.  So even if you don’t hear from me right away on Monday, you can expect my take on the budget by Tuesday. Yeh, mon — mos def!

An Inconvenient Tax - Official Trailer from Life Is My Movie Entertainment on Vimeo.

The Washington Post’s Lori Montgomery reports on today’s Senate passage of the required increase in the debt limit:

The Senate agreed Thursday to raise the legal limit on government borrowing to $14.3 trillion, a historic high that would permit the Treasury Department to cover the nation’s bills through early next year.

The vote fell along party lines, with all 60 Democrats supporting and 39 Republicans opposing a plan to increase the cap by a record $1.9 trillion. The 40th Republican, Sen. Mike Enzi of Wyoming, said his no vote was accidentally unrecorded. If lawmakers had approved a smaller increase, Democrats would have had to revisit the deeply unpopular topic of the soaring national debt before facing voters in November.

Along with the debt limit increase, however, the Senate passed a statutory version of pay-as-you-go budget rules, which in general is a good way to promote bipartisan fiscal discipline, except that this endorsement of PAYGO was far from bipartisan, and this form of the PAYGO rule far from highly disciplined:

Even as they extended Treasury’s authority to borrow, Democrats moved to rein in large budget deficits that are projected to drive the debt to dangerous levels by the end of this decade. As part of the debt limit bill, the Senate voted again along party lines to revive pay-as-you-go budget rules that bar lawmakers from increasing future deficits through tax cuts or new entitlement spending. The House is expected to take up the legislation next week.

A similar rule helped the nation balance its budget in the 1990s, but the new version would carve out $1.6 trillion in exceptions so Democrats could extend tax cuts for the middle class and avert a scheduled pay cut for doctors who treat Medicare patients without finding ways to offset those costs.

Why didn’t any Republicans support the PAYGO provision?  As Sam Stein explains, it’s probably mostly because the PAYGO rule would apply to tax cuts as well as mandatory spending increases.  Both would have to be paid for with offsetting tax increases or spending cuts…. well, unless you’re talking about the ever-deficit-financed Bush tax cuts–or the “doc fix” which proliferated during the Bush Administration as well.

So much for a renewed concern for fiscal responsibility bringing the parties together to meet in the center.  As I spoke of in this NPR story today, until President Obama starts leveling with the American people and talking with them about the tough choices that need to be made on both the tax and the spending sides of the budget, none of the members of Congress are going to work that hard at compromising and coming together with the other side.  And why should the Republicans have to give up their deficit-financed tax cuts when President Obama himself is proposing to continue them?

No policymaker likes to admit that tax cuts are no better than spending programs–well, because they are better to a politician, because they don’t get scrutinized the way direct spending programs do, they look like they reduce the economic burdens on current Americans, and if deficit-financed will merely shift the economic burden onto those future generations who don’t yet vote.  The naivety that most people have about tax policy is a big problem and is the motivation for the new documentary featured above (to be released on April 15th).  This naivety encourages the President to avoid talking about (let alone proposing) fiscally responsible tax policy, which I believe in turn leads to the sort of (”lite”) PAYGO rule and (”unipartisan”) vote we’ve seen today.

The President said some good things tonight about fiscal responsibility, and he endorsed the fiscal commission as well as statutory PAYGO budgeting.  He just didn’t get very specific about the types of tough choices the commission would have to recommend (that we will have to reform our entitlement programs and raise taxes), or exactly which tax cuts and spending would have to be paid for under PAYGO and which would not.  And I definitely heard more bipartisan applause for all the tax cuts he mentioned (especially the capital gains tax cuts) than for any part of his fiscal responsibility talk.

Some of these fiscal policy highlights from the President’s speech (emphasis and notes added to the CNN transcript):

That’s why we…passed 25 different tax cuts.

Let me repeat: We cut taxes. We cut taxes for 95 percent of working families. We cut taxes for small businesses. We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college.

I thought I’d get some applause on that one… [and he did]…

So tonight, I’m proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat. I am also proposing a new small business tax credit — one that will go to over one million small businesses who hire new workers or raise wages. While we’re at it, let’s also eliminate all capital gains taxes on small business investment; and provide a tax incentive for all businesses, large and small, to invest in new plants and equipment…

To make college more affordable, this bill will finally end the unwarranted taxpayer-subsidies that go to banks for student loans. Instead, let’s take that money and give families a $10,000 tax credit for four years of college and increase Pell Grants. And let’s tell another 1 million students that when they graduate, they will be required to pay only 10 percent of their income on student loans, and all of their debt will be forgiven after 20 years — and forgiven after 10 years if they choose a career in public service…

[I]t is precisely to relieve the burden on middle-class families that we still need health insurance reform.

Now let’s clear a few things up — I did not choose to tackle this issue to get some legislative victory under my belt. And by now it should be fairly obvious that I didn’t take on health care because it was good politics…

[E]ven as health care reform would reduce our deficit, it’s not enough to dig us out of a massive fiscal hole in which we find ourselves. It’s a challenge that makes all others that much harder to solve, and one that’s been subject to a lot of political posturing.

So let me start the discussion of government spending by setting the record straight. At the beginning of the last decade, America had a budget surplus of over $200 billion. By the time I took office, we had a one year deficit of over $1 trillion and projected deficits of $8 trillion over the next decade. Most of this was the result of not paying for two wars, two tax cuts, and an expensive prescription drug program. On top of that, the effects of the recession put a $3 trillion hole in our budget. That was before I walked in the door.

Now if we had taken office in ordinary times, I would have liked nothing more than to start bringing down the deficit. But we took office amid a crisis, and our efforts to prevent a second Depression have added another $1 trillion to our national debt. That too is a fact.

I am absolutely convinced that was the right thing to do. But families across the country are tightening their belts and making tough decisions. The federal government should do the same. So tonight, I’m proposing specific steps to pay for the $1 trillion that it took to rescue the economy last year.

Starting in 2011, we are prepared to freeze government [non-security discretionary] spending for three years. Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will.

We will continue to go through the budget line by line to eliminate programs that we can’t afford and don’t work. We’ve already identified $20 billion in savings for next year. To help working families, we will extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, investment fund managers, and for those making over $250,000 a year. We just can’t afford it.

Now, even after paying for what we spent on my watch, we will still face the massive deficit we had when I took office. More importantly, the cost of Medicare, Medicaid and Social Security will continue to skyrocket. That’s why I’ve called for a bipartisan fiscal commission, modeled on a proposal by Republican Judd Gregg and Democrat Kent Conrad. This can’t be one of those Washington gimmicks that lets us pretend we solved a problem. The commission will have to provide a specific set of solutions by a certain deadline. [NOTE: No mention of cutting Social Security or Medicare benefits or raising taxes.] Yesterday, the Senate blocked a bill that would have created this commission. So I will issue an executive order that will allow us to go forward, because I refuse to pass this problem on to another generation of Americans. And when the vote comes tomorrow, the Senate should restore the pay-as-you-go law that was a big reason why we had record surpluses in the 1990s. [NOTE: No mention of PAYGO exemptions.]

I know that some in my own party will argue that we can’t address the deficit or freeze government spending when so many are still hurting. I agree, which is why this freeze won’t take effect until next year, when the economy is stronger. But understand — if we don’t take meaningful steps to rein in our debt, it could damage our markets, increase the cost of borrowing, and jeopardize our recovery — all of which could have an even worse effect on our job growth and family incomes.

From some on the right, I expect we’ll hear a different argument — that if we just make fewer investments in our people, extend tax cuts for wealthier Americans, eliminate more regulations, and maintain the status quo on health care, our deficits will go away. The problem is, that’s what we did for eight years. That’s what helped lead us into this crisis. It’s what helped lead to these deficits. And we cannot do it again.

Rather than fight the same tired battles that have dominated Washington for decades, it’s time to try something new. Let’s invest in our people without leaving them a mountain of debt. Let’s meet our responsibility to the citizens who sent us here. Let’s try common sense.

To do that, we have to recognize that we face more than a deficit of dollars right now. We face a deficit of trust — deep and corrosive doubts about how Washington works that have been growing for years…

Incidentally, if we follow the suggestion that we can keep cutting taxes and yet manage to reduce the deficit to a more sustainable (or even zero) level, we’re liable to end up with a proposal like Rep. Paul Ryan’s (R-WI) “roadmap” plan, which CBO released their analysis of today.  Ryan holds federal revenues at 19 percent of GDP going all the way out to 2080, yet he manages to completely pay down the federal debt.  How does he do it?  By cutting Medicare spending from its projected 14.3 percent of GDP in 2080 down to just 3.5 percent of GDP (see Table 1 on page 6)–a cut of more than three-fourths and 10.8 percent of GDP! (Medicaid gets a similar percentage cut.)  This is “bending the health cost curve” all the way down to flat-lining it–an outcome I have publicly proclaimed as “impossible” if our society is a “compassionate” one.  (Wow.) But I’ll have more to say on the tax-side versus spending-side approaches to deficit reduction–using CBO’s baseline and Ryan plan analysis–in a later post.   Now I’ve got to hear what all the late-night talking heads have to say about the SOTU speech.

The amendment to the debt limit increase calling for the Conrad-Gregg fiscal commission (designed to encourage deficit reduction) was “defeated” yesterday by failing to garner the filibuster-proof 60 votes, although a majority of the senators (53) did support it (and Senator Conrad said at his press conference it would have been 54 had Senator Murkowski (R-AK) been there to vote).  Stan Collender points out that it was an “absolutely bipartisan” “defeat”–in fact a downright (bipartisan) “deficit smackdown” (I think he means “deficit reduction smackdown”).  Well, I prefer to see the glass as (more than) half full:  there were 53 senators who voted “yes” on the commission, and there were both Democrats (36) and Republicans (16) (and one Independent, Lieberman) in that column.  Since Stan already reproduced the “Nays” list that he seems to be honoring, I’d like to highlight the “Yeas”:

My problem with Stan’s seeming praise for the “Nay”-sayers is that I don’t believe the “bipartisan” objections to the commission represent “bipartisan” support for any other way out of our fiscal state.  Many of the senators who voted against the Conrad-Gregg commission were not just objecting to the process of having to vote on the commission’s recommendations; they were objecting to the inevitable recommendations themselves–that we might actually have to raise taxes or reform the Medicare and Social Security programs (and possibly cut someone’s benefits).

That’s why I’m proud of my senators from Virginia, Mark Warner and Jim Webb, who were the only two senators who both voted for the Conrad-Gregg commission and refused to support the Baucus amendment (despite being of the same party as Baucus).  I think the Baucus amendment is a prime example of how far from bipartisanship we actually are when it comes to fiscal responsibility and deficit reduction; it basically says “hands off Social Security”–which directly contradicts the notion (which I think the Conrad-Gregg commission supports) that the only way we are going to solve the deficit problem is to work together and put “everything on the table.”   Here is the key passage from the text of the amendment (emphasis added):

(a) LIMITATION ON CHANGES TO THE SOCIAL SECURITY ACT.–Notwithstanding any other provision of law, it shall not be in order in the Senate or the House of Representatives to consider any bill or resolution pursuant to any expedited procedure to consider the recommendations of a Task Force for Responsible Fiscal Action or other commission that contains recommendations with respect to the old-age, survivors, and disability insurance program established under title II of the Social Security Act.

Yet the Baucus amendment received the support of all of the senators except Senators Warner and Webb, who both abstained from the vote.  The amendment passed with 97 “Yeas”, 0 “Nays”, and 3 “not voting” (Senator Murkowski was not present).

I would have preferred to see some “Nays” on this, but frankly, I’m just puzzled why there was so much “bipartisan” support for the Conrad-Gregg commission itself and yet so much willingness (via the Baucus amendment) to do the very thing the commission is intended to avoid: taking options off the table that one side or the other doesn’t like.

[**ADDENDUM 1 pm:  And speaking of sincerity about the kind of "bipartisanship" that might actually work to reduce the deficit, here's a nice op-ed by Senator Warner that was published last week in the Richmond Times-Dispatch.  I found this on his Facebook page, where I was already a "fan."  And how about his "tweet" from yesterday:  "Disappointd by Sen's rejectn of biprtsn panel to tackle fed budget deficits. Neither party will make hard choices on its own"]