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If only it took just this to get us back to fiscal sustainability: put back in place the budget director who last saw the federal government running budget surpluses–Jack Lew, President Clinton’s last OMB director.  Well, it can’t work as magically as that, unfortunately, despite the President’s whimsical remarks that may suggest so. But Jack Lew does know more than the mere experience of budget surpluses; he understands the policies that produced those surpluses.  And I presume he remembers that although there was certainly a little bit of luck involved in the “irrational exuberance” of the stock market in the late 1990s which provided such convenient, repeated “revenue surprises” (via capital gains and dividend tax revenues), there was a bit of hard and good policy work in the Clinton mix, too, with effective budget rules that controlled spending (statutory PAYGO without costly exemptions, caps on discretionary spending), and even tax increases that raised revenue (yes, raised revenue!) and national saving and, hence, economic growth.

So now Jack Lew will get a chance to advise President Obama on what he should do about the Bush tax cuts which he presumably did not approve of at the end of the Clinton Administration, at a time when we were projected to run $5.6 trillion in surpluses over the next ten years (FY2002-11).  If those tax cuts were considered fiscally irresponsible back then, how will they be seen in this new context of $6 trillion to $10 trillion in projected deficits over the now next ten years (FY2011-20)?  Will turning them into the Obama tax cuts under the direction of a Clinton-surpluses budget director somehow make them better?  The coming debate over what to do with these tax cuts is sure to be very interesting–but also quite agonizing for anyone with Jack Lew’s combination of historical budget experience and current budget role.

A very interesting column by Joe Keohane in the Boston Globe has my Concord Coalition colleagues depressed about what it suggests is the futility of our mission in reaching out and educating the public about fiscal responsibility:

Recently, a few political scientists have begun to discover a human tendency deeply discouraging to anyone with faith in the power of information. It’s this: Facts don’t necessarily have the power to change our minds. In fact, quite the opposite. In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger.

This bodes ill for a democracy, because most voters — the people making decisions about how the country runs — aren’t blank slates. They already have beliefs, and a set of facts lodged in their minds. The problem is that sometimes the things they think they know are objectively, provably false. And in the presence of the correct information, such people react very, very differently than the merely uninformed. Instead of changing their minds to reflect the correct information, they can entrench themselves even deeper.

“The general idea is that it’s absolutely threatening to admit you’re wrong,” says political scientist Brendan Nyhan, the lead researcher on the Michigan study. The phenomenon — known as “backfire” — is “a natural defense mechanism to avoid that cognitive dissonance.”

And some of the professor’s examples of this psychological dysfunction? (my emphasis added for obvious reasons):

New research, published in the journal Political Behavior last month, suggests that once those facts — or “facts” — are internalized, they are very difficult to budge. In 2005, amid the strident calls for better media fact-checking in the wake of the Iraq war, Michigan’s Nyhan and a colleague devised an experiment in which participants were given mock news stories, each of which contained a provably false, though nonetheless widespread, claim made by a political figure: that there were WMDs found in Iraq (there weren’t), that the Bush tax cuts increased government revenues (revenues actually fell), and that the Bush administration imposed a total ban on stem cell research (only certain federal funding was restricted). Nyhan inserted a clear, direct correction after each piece of misinformation, and then measured the study participants to see if the correction took.

For the most part, it didn’t. The participants who self-identified as conservative believed the misinformation on WMD and taxes even more strongly after being given the correction. With those two issues, the more strongly the participant cared about the topic — a factor known as salience — the stronger the backfire…

But Joe Keohane goes on to describe some potential solutions to work around this “entrenchment” protective mechanism:

But researchers are working on it. One avenue may involve self-esteem. Nyhan worked on one study in which he showed that people who were given a self-affirmation exercise were more likely to consider new information than people who had not. In other words, if you feel good about yourself, you’ll listen — and if you feel insecure or threatened, you won’t. This would also explain why demagogues benefit from keeping people agitated. The more threatened people feel, the less likely they are to listen to dissenting opinions, and the more easily controlled they are.

There are also some cases where directness works. Kuklinski’s welfare study suggested that people will actually update their beliefs if you hit them “between the eyes” with bluntly presented, objective facts that contradict their preconceived ideas.

So let me give this a shot.  (I’m feeling a bit more optimistic than the rest of my colleagues.)  Repeat after me:

“I’m smart”…

“I’m thoughtful”…

and…

“The Bush tax cuts are very costly.”

In case you missed it, on the 4th of July CNN’s Fareed Zakaria (on his “GPS” show) hosted a debate between Paul Krugman and Niall Ferguson (video embedded above; link to video on CNN site is here).

But as I’ve mentioned before, I don’t think it has to be a “versus” situation.  We can do both, and in fact, that would be the ideal combination of strategies to promote both a better outlook for the federal budget as well as a stronger longer-term economy.  Last week I did a radio show on Minnesota Public Radio with UC Berkeley’s Alan Auerbach (you can listen here –the first few minutes are the most relevant), and both of us were singing that tune. And if you keep watching the CNN video until you get to Fareed’s own conclusion–following his careful consideration of Krugman’s and Ferguson’s different sides of the issue–you’ll notice he seems to feel the same way.

(Chart taken from TaxVox blog (post by D. Marron), 7/7/10.)

Today’s blog post by Donald Marron and column by the Washington Post’s Ruth Marcus give me occasion to say “here, here” as well as an excuse to trot out yet again a really old point (or maybe three points) I’ve made over and over again on this blog (but which I personally never tire of as long as it’s clear most Americans and our policymakers still don’t get it):

1. We need more tax revenue;
2. the current-law baseline is a good “role model” for the right level of revenue; but…
3. sticking to current-law baseline revenue levels doesn’t require sticking to current tax law, and doesn’t even require seeing marginal tax rates go up.

Donald explains “why taxes are [inevitably] going up” (it’s going to be impossible to flat-line health spending or otherwise reform entitlements fast enough), and he points out that the CBO baseline shows us that taxes are already scheduled to go up according to what’s already in current tax law:

Revenues are already on track to rise substantially in coming years. And not just because of an economic rebound and expiring tax cuts. There are structural reasons why tax revenues will grow faster than the economy. The Congressional Budget Office estimates that tax revenues will rise from 14.9% of GDP in 2010 to 20.7% in 2020 and 23.3% in 2035 if current law remains in place…

That rapid growth reflects six factors. First, the economy will recover, lifting revenues from currently depressed levels. Second, the 2001 and 2003 tax cuts will expire, as will tax cuts enacted in the 2009 stimulus. Third, the Alternative Minimum Tax, which is not indexed for inflation, will boost taxes for millions more taxpayers. Fourth, the new taxes that helped pay for the recent health legislation will go into effect. Fifth, retiring baby boomers will make more taxable withdrawals from tax-deferred retirement accounts. Finally, in a phenomenon known as bracket creep, growing incomes will push taxpayers into higher brackets and reduce their eligibility for various credits.

So one way to achieve a more sustainable outlook as far as the revenue side of the budget goes is to just let current tax law happen–and avoid passing any new tax legislation, including any extension of any of the Bush tax cuts.  But that’s not the only way…

Ruth discusses an alternative tax policy strategy made popular by President Obama:  raise taxes only on the rich.  (You see, the trouble with currently scheduled revenue increases is that much of that revenue would come from the middle class.)  It sounds like a great idea, until you realize that relying on such a small fraction of the population for most of the needed tax revenue sets up a really tiny tax base that requires really high marginal tax rates in order to raise the required level of revenue–precisely the economist’s definition of a highly inefficient tax system.  It gets all economists, even those not considered “supply-side” economists, nervous.  And it sets up a bad political dynamic where people will be encouraged to clamor for more government spending without regard for its cost, when they think that it’ll always be someone else (those ultra-rich people and those evil corporations) who will pay for it.

But we also probably don’t want to let current tax law totally play out because some of those tax increases Donald lists we really don’t want to see–such as an alternative minimum tax that would extend its reach down to those considered truly “middle class.”  And even those tax increases that don’t seem quite so objectionable–such as letting the entirety of the Bush tax cuts expire (at least eventually) and going back to Clinton-era income tax rates across the board–still raise marginal tax rates in ways that would increase the inefficiency of the federal tax system and could at least partially offset the positive economic effects of deficit reduction.

The CBO long-term budget outlook shows us that sticking to current-law baseline revenue levels is a good and fairly immediate strategy for fiscal sustainability (where debt/GDP is relatively stable, staying below 80 percent over the next 25 years).  In contrast, CBO’s “alternative fiscal scenario” assumes the bulk of the Bush tax cuts, the ones President Obama wants to keep, are extended, which leads to debt reaching 185 percent of GDP in 25 years (and continuing to grow exponentially thereafter). Donald Marron labels this scenario as “Temptation” in his graph above but I think it should be more accurately labeled “Done Deed”, those being the tax cuts exempted from the statutory pay-as-you-go rule.

But the funny thing is that current tax law is probably not the best way to raise the current-law level of revenues.  Put this challenge to any tax economist:  how can we raise that given level of revenue most efficiently? –and you will get the answer that we need to find the marginal (new) sources of revenue from the broadest, most neutral/efficient tax bases available to us.  There are two main possibilities here, and I think we ought to seize both possibilities:

1. reform the existing federal income tax system to clean up and broaden the income tax base–e.g., close up inefficient tax expenditures that “poke holes” in the income tax base (the many exclusions/exemptions, deductions, and credits); or
2. add on “cleaner” (broader, purer, or externality-correcting) new tax bases–e.g., an add-on value-added tax (VAT) or environmentally-motivated taxes such as a carbon tax.

With these sorts of base-broadening strategies to achieve current-law revenue levels, marginal tax rates on productive economic activities don’t have to come up.  Thus there doesn’t have to be a tradeoff between the positive economic growth effects of deficit reduction and the negative economic growth effects of higher marginal tax rates on income.  There doesn’t have to be a tradeoff at all.

Hey, let’s get real: extended unemployment benefits are an effective form of stimulus spending, and although they do add to the short-term deficit, they are not part of the longer-term deficit problem. Nowhere in CBO’s report on the long-term budget outlook will you find different assumptions about unemployment benefits. It’s all about what we do with the Bush tax cuts and how well health reform will work. (More on this soon, I promise.)

This open letter to Senator Scott Brown by the Boston Globe’s Scot Lehigh says it well. Scot even quotes two of the most vocal (and sincere) deficit hawks around:

…take it from David Walker, former US comptroller general and now, as president of the Peter G. Peterson Foundation, a leading deficit hawk. “While the current deficits are large, they don’t represent the real threat to the future of the country,’’ he said. “The real threat is the medium-to-longer term structural deficits that will be here after the economy has recovered.’’…

No fiscal falcon with a proper balance of economic and fiscal priorities is going to fault you for supporting that extended aid.

“As a deficit hawk, I wouldn’t worry about extending unemployment benefits,’’ said Bob Bixby, president of the Concord Coalition. “It is not going to add to the long-term structural deficit, and it does address a serious need. I just feel like unemployment benefits wandered onto the wrong street corner at the wrong time, and now they are getting mugged.’’

Let’s face it: those who use their “worry” about our longer-term fiscal outlook as a reason to oppose extended unemployment benefits don’t want to reduce the deficit as much as they want to get rid of unemployment benefits.  It is just a convenient excuse to “mug” those benefits and deny many American families that assistance they so badly need.

I haven’t had a chance to digest CBO’s long-term outlook yet (released earlier today), but luckily I did see Ezra Klein’s post on it, which featured two charts which highlight the difference between CBO’s current-law baseline (pictured above), and their “alternative fiscal scenario” which is more of a “policy-extended” baseline–similar to the one the Obama Administration uses as the baseline relative to which they measure the costs (or savings) of their budget proposals.

As Ezra points out, current law, taken literally as CBO must assume, is fiscally responsible:

In theory, CBO’s deficit assumptions project the effects of settled law. And if you do that, revenues pretty much pay for spending over the next few decades.

Note that the chart shows that under CBO’s “extended baseline” scenario, reflecting current law, “primary balance” is achieved, where there is no “fiscal gap” between non-interest spending and revenues.  That doesn’t mean the federal budget is perfectly balanced, because interest costs take total federal spending above revenues, but it does mean that the deficit is pretty small–as a matter of fact, less than 3 percent of GDP by 2015, which means it’s economically sustainable (because at 3 percent, the stock of federal debt is growing at about the same pace as the economy).

Coincidentally, this picture above could also be labeled “2015 Goal of President Obama’s Fiscal Commission”–because the commission’s goal is also to achieve “primary balance” and a “sustainable” level of deficits by 2015.

So CBO is showing us we don’t have to do anything to achieve fiscally-responsible policy over the next 25 years.  It’s already set by laws we’ve already passed.  Congress can go home.  They don’t need to pass any deficit-reducing legislation, and President Obama doesn’t have to sign it.

Well, unfortunately life is not so simple.  As Ezra warns:

But current law is not likely to advance unmolested. You’ll notice, for instance, that there’s a big jump in current-law revenues next year. That’s because the Bush tax cuts are slated to expire totally. But few expect Congress to allow them to expire totally. They’re likely to preserve the bulk of the cuts, rejecting only some of the cuts that helped out the rich.

Ah, but here’s where the President’s fiscal commission can help us stick to the “simple” solution of holding onto current law.  They can make it simpler to hold onto this fiscally-responsible, current-law policy over the longer run by giving their blessing to letting go of current law (only) temporarily–letting Congress and President Obama enact a (popular) tax cut to help the recovering-but-still-weak economy: an only temporary extension of the bulk of the Bush tax cuts.  In exchange, the commission could require that the federal government get back on track in a couple years, recommitting to the picture above by getting back to the current-law baseline level of revenues.  That doesn’t have to mean sticking to current tax law, but it does mean that any deviations from that “script” will have to be revenue-neutral.  And that sounds a lot like an exercise in fundamental tax reform, which could boost the strength and sustainability of our federal revenue system even beyond the next 25 years.

In fact, this was a strategy that Bob Bixby, the Concord Coalition’s executive director (and my boss), recommended to the President’s commission today.  From his written testimony:

That leaves us with tax policy. Sticking to the CBO current-law baseline on taxes, 19.7 percent of GDP, gets the budget deficit to the commission’s target. Legislatively, that represents the easiest option, as policymakers simply need to do nothing and let current law play out.

However, that does not mean current law represents the most desirable policy path to achieve the baseline level of revenues. If reverting to the pre-2001 era tax policy (with its higher marginal tax rates) at the beginning of 2011 is deemed undesirable for political reasons, or out of economic concern for raising marginal tax rates during the early stages of economic recovery, tax policy could be reformed to achieve the same revenue levels without raising marginal tax rates.

The commission might find fertile common ground on steps to improve the tax code in ways that would increase efficiency and thus increase revenues. A thorough scrubbing of the system to identify preferences that serve no compelling use or that could be altered in a resetting of priorities is long overdue.

The fact that the commission’s short-term goal is to achieve a lower deficit by 2015 and not sooner suggests a tax policy strategy that could acknowledge the concern of many economists about the dangers of “unwinding” our currently stimulative fiscal stance too quickly. The 2001 and 2003 tax cuts that President Obama has proposed to permanently extend could instead be extended only temporarily. If done for one or two years, this would be long enough not just to allow for a more solid economic recovery, but also long enough to develop a more fundamental reform of the federal tax system that could more efficiently achieve current-law revenue levels by 2015.

This would provide an opportunity to enact a tax policy that meets the commission’s 2015 goal, while earning bipartisan support, while also building a tax system capable of remaining adequate and economically efficient over the longer term — boosting our chances for economic growth and a more sustainable fiscal future.

And so, Ezra’s take-away lesson from the CBO report is (emphasis added):

Either Congress can pass and implement policies that will bring the long-term deficit under control or it can’t. Those are the only two choices here. But there’s no real mechanism for getting the deficit under control aside from Congress passing laws and then sticking to them.

I’ll have some of my own analysis of the CBO long-term outlook report later this week.  There have been some changes to the two baselines CBO defines, some of those changes a bit puzzling and even intriguing.

(My Concord colleague, Josh Gordon, blogged more comprehensively about the CBO report and Bob’s testimony on Concord’s Tabulation blog today.  As he emphasizes, our recommendations for achieving longer-term fiscal sustainability are not just “stick with current tax law” or the “stick with the current-law revenue baseline.”  The largest longer-term challenge remains health care spending.  But the biggest and most reliable “2015 lever” is clearly tax policy, and no matter how great the health-reform lever eventually works decades from now, we’ll still need the tax system to support that not-so-outrageous-but-still-expensive health care system over the longer run.)

In his latest wailing on the failure of politics to produce wise fiscal policy (on any front it seems, lately), Ezra Klein describes what would be the ideal policy were it not for the screwed-up politics (bolding added):

Short-term stimulus spending need not conflict with deficit reduction. A fairly serious injection of funds — say, $300 billion over the next two years — could be paired with twice as much deficit reduction in the three years following the spending. Few economists, I think, would argue against the combination of short-term spending and longer-term deficit reduction if they believed the deficit reduction was certain. But the American political system has a lot of trouble making unpopular choices and some trouble sticking to those choices once they’re made. This is where you might expect a bloc of deficit hawks to step into the middle of the legislative debate with a proposal pairing spending in 2011 with savings beginning in 2014, but we’ve seen no such thing…

I still maintain I know the answer–or at least one pretty good possible answer–to the riddle:  How can we find such a policy that Ezra describes as “pairing spending in 2011 with savings beginning in 2014?”  My answer is to extend only the Obama-proposed portions of the Bush tax cuts only temporarily, with a call for revenue neutrality relative to current law (i.e., sticking to the CBO baseline level of revenues) beyond that one or two years.  If policymakers think they can do better than simply reverting back to Clinton-era tax policy (still not such a bad option in my opinion), they can work on fundamental tax reform to achieve the revenue-neutral (or better) goal.

If we’re serious about deficit reduction and the “checkpoint” quantitative (and shorter-term) goal of the President’s fiscal commission to get deficits as a share of the economy down to 3 percent by 2015 (versus 4 percent under the President’s budget proposals), then one way to get there is to stick to the current-law level of revenues.  But that doesn’t necessarily mean sticking with current tax law itself.  Saying that tax policy could be anything as long as it raised the same amount of revenue under current-law policies is exactly how tax economists set up any mental exercise in fundamental tax reform.  And when we tax economists go through such careful thinking of what tax policy is supposed to do and how its efficiency and fairness could be improved, we always think about the definition of the tax base–how broad and how neutral it is–well before we obsess over tax rates.  And when we think of ways to broaden the tax base and make it more neutral and more efficient, it seems the first item on all our lists (whether we be liberal-leaning or conservative-leaning tax economists), is to eliminate or at least reduce the single largest “tax expenditure” in the federal budget–the exclusion from taxation of employer-provided health benefits (worth about $250 billion a year).

So the beauty of the “stick to current-law revenue levels by 2015” goal is that it would serve many purposes.  It would: (i) allow the short-term stimulus provided through the tax cuts to continue temporarily, (ii) achieve the fiscal commission’s goal of the 3 percent of GDP deficit in 2015, (iii) set up the motivation for revenue-neutral, base-broadening fundamental tax reform, which would in turn (iv) likely lead to some reduction in the employer-provided health exclusion which would both turn a revenue-neutral reform into a revenue-gaining one over time (because the costs of the exclusion grow over time with health costs) and would be consistent with the goals of health-care reform (to bring down costs by reducing excess demand), and thus (v) improve longer-term (and not just 2015) fiscal sustainability from both the tax side and health spending sides of the budget.

And earlier this morning, Ezra linked to this IMF blog post by Olivier Blanchard and Carlo Cottarelli on the “Ten Commandments for Fiscal Adjustment in Advanced Economies.” I look over this list of “commandments” and think that a tax policy change of the type I’m describing here–where we don’t just stick to current-law revenue levels by just not doing anything, but use the fiscal commission’s goal to motivate thoughtful tax reform–would obey all of them (or at least be consistent with all of them).

And I don’t mean to suggest this is a cure-all for our long-term fiscal woes, because it’s not.  We need to reform the big entitlement programs, too (and even cut “waste, fraud, and abuse” wherever we can find it), because otherwise even a much more efficient tax system still won’t be able to “keep up.”  But in my mind tax reform holds a lot more promise than people (even the policy experts) seem to be acknowledging.  I think it’s even a more promising solution accounting for the messy politics.  So I hope the President’s fiscal commission starts talking about it–often, clearly, and enthusiastically.

While on the Fiscal Wake-Up Tour, David Walker used to refer to those who take moderate/bipartisan positions on fiscal responsibility (e.g., suggesting that a mix of tax increases and spending restraint is needed) as the “sensible center.”  In his Washington Post column today, Matt Miller suggests this centrist position is no longer “sensible,” but “radical”:

It’s striking that both liberals and conservatives are convinced nowadays of the imminent demise of the other side’s governing philosophy. The left says the shocking toll of BP’s recklessness and Wall Street’s greed proves the folly of deregulation and unfettered markets. The right looks at Greece, Europe’s welfare strains, and Britain’s stunning new austerity budget and shouts with similar fervor that bloated government is on borrowed time.

The fascinating thing is that both groups are correct about the obsolescence of the other side’s key premises, yet blind to the staleness of their own. What partisans on neither side seem to sense is that events are poised to consign many traditional priorities of both conservatives and liberals to the ash heap.

You’d never know this from the phony way public life is conducted. While independents are America’s largest voting bloc, the left and right retain a stranglehold on the debate. Only the shrill prevail. On TV, talk radio or the campaign trail, it’s almost impossible to hear the kind of common sense that takes us beyond the usual partisan tropes.

Think about it: How often do you hear the same pundit or politician say that (1) we need to reform Wall Street compensation so bankers can’t get rich taking gambles whose losses get picked up by taxpayers (”liberal”), and that (2) Social Security’s growth needs to be trimmed (”conservative”)? Or that (1) we need to scale back gold-plated public employee pensions (”conservative”) and (2) raise taxes in sensible ways to fix our fiscal woes (”liberal”)?

These ideas aren’t inconsistent or incoherent — they’re pragmatic responses to the challenges we face. But our entire system conspires to ban the expression of a practical synthesis of the best of “liberal,” “conservative” and more eclectic views.

That’s why what Steny Hoyer said on Tuesday was considered by most of us who really do care about fiscal responsibility (and not just low taxes or just more spending) as very brave.  (And today the Washington Post editorial board tips their hat to him.)  Hoyer did get more specific about a list of sensible, bipartisan policy ideas that are clearly broadly tough choices–not just the “freebies” that sound like they would cut only “wasteful” spending or raise taxes only on evil corporations or the super rich.  And for a long time now (pretty much since we said “easy come, easy go” with the Clinton-era surpluses), talking plainly and sensibly about what it takes to achieve fiscal sustainability has become more and more a radical thing to do.

…And yes, I have heard that Peter Orszag is leaving OMB and the Obama Administration, and, yes, I’m hopeful that once he’s out of the Administration, he can get back to talking more “radically,” too.  (Perhaps his version of David Stockman’s “Triumph of Politics” is coming?)

House Majority Leader Steny Hoyer gave an excellent speech this morning at an event hosted by “Third Way.” (**UPDATE 11:30 pm: here is a link to a C-SPAN video that covers Hoyer’s speech and Q and A and the panelist opening remarks, but not the panelist Q and A.)  I thought he well-modeled that “third way” behavior by pointing out how the typically polarized positions on three major fiscal policy debates:  (i) stimulus vs. deficit reduction, (ii) (reducing the deficit via) tax increases vs. spending cuts, and (iii) being for extending the Bush tax cuts or against them–the notion that it has to be all one and not any of the other–is neither productive nor reasonable.  I thought he showed great courage and determination to make these statements and moves toward that middle path before leadership from the other side of the aisle shows any such willingness.

On the false claims by some politicians that one has to be either for attending to the short-term economy or for reducing the deficit (that we can’t “both walk and chew gum”), Hoyer remarked (emphasis added):

“It’s an excellent measure of someone’s seriousness to see whether they point their finger at so-called ‘out-of-control spending’ in this Congress, or whether they face the real danger to our future—the structural deficit. Overreacting to short-term deficits, while we’re still feeling the effects of recession, will send our economy back into a tailspin, put even more Americans out of work, and increase the very deficits we are trying to reduce. It’s the mistake President Roosevelt made in 1937, when he prematurely cut off recovery from the Depression—and it’s a mistake we must not repeat.

“For the sake of the millions of Americans who are still struggling, job creation must still be Congress’s top priority. But we’ve seen resistance to more justifiable efforts to create jobs with unpaid spending, and even to keep teachers at work educating our children, because of concerns about the deficit. And many Members of Congress agree with the Washington Post, when it argued in an editorial this month, ‘We’d find the stimulus-now, spinach-later argument more credible if its advocates gave some hint of where the long-term belt-tightening will take place.’ I agree. An excellent way to build support for the job creation we still need is making credible and detailed plans to tackle the long-term debt. So now is the time to start talking about a solution to the structural deficit—one we’ll be ready to put in place once the economy is fully recovered.

“It is essential that we move from temporary extensions to permanent solutions, but we cannot consider those solutions without taking into account our long-term fiscal challenges. Permanent solutions for the estate tax, AMT, and the ‘doc fix’ should be developed in the context of the broader budget agreement that I’ll discuss shortly. And as the House and Senate debate what to do with the expiring Bush tax cuts in the coming weeks, we need to have a serious discussion about their implications for our fiscal outlook, including whether we can afford to permanently extend them before we have a real plan for long-term deficit reduction. At a minimum, the House will not extend the tax cuts benefitting taxpayers of incomes above $250,000, despite some suggestions in the Senate that they be extended along with all other Bush tax cuts. As CBO Director Doug Elmendorf recently warned, extending all of the Bush tax cuts without making any other changes in policy would put us on a path toward a publicly-held debt equal to 90% of GDP by the end of the decade, ‘territory that is unfamiliar to us and to most developed countries in recent years.’

And to that false choice (being either for the Bush tax cuts or against them), I would add the false choice that we could either only: (i) temporarily extend all of the Bush tax cuts, or (ii) permanently extend just the “middle-class” tax cuts that President Obama has proposed (permanently) extending.  I happen to believe (and I have said this before) it would be possible and desirable to push for only temporary extension of only the “middle-class” portion of the Bush tax cuts–which is still most of the tax cuts (over $2 trillion out of $2.6 trillion worth over ten years) to most of the people (actually benefitting all of the people who benefit from the current Bush tax cuts, even those taxpayers who reach the upper brackets but also pass through all the lower ones), and would provide most of the short-term stimulative benefit we could hope to get out of extending the Bush tax cuts (because it would provide immediate tax cuts that would have more “bang per buck” in being less concentrated on the rich).

And if we only temporarily extended only the middle-class portions of the tax cuts, that would be tax policy that recognizes and reconciles the need for continued short-term stimulus with the need for longer-term deficit reduction.  As I commented to CQ’s Richard Rubin, besides this “third way” or “middle path” approach to the Bush/Obama tax cuts making economic sense, I think this is not such a difficult political position for a policymaker to place oneself:

In addition to the concerns from moderates, more liberal Democrats who opposed the tax cuts in 2001 and 2003 as being fiscally irresponsible during a time of budget surpluses will have a hard time explaining why extending them amid budget deficits makes sense. The answer, said Rogers of the Concord Coalition, may be a temporary extension of the cuts that avoids raising taxes during an economic downturn and does not carry such a big price tag.

“An easier position for them to defend is maybe insisting that any extension of the Bush tax cuts be only temporary, but not permanent,” she said. “It’s not like they’re opposing the tax cuts. They’re opposing the fiscally irresponsible part of the tax cuts.”

The Washington Post’s Lori Montgomery reported on the Hoyer speech in advance of the speech.  Incidentally, I think she pretty substantially understates the cost of extending the “middle-class” portions of the Bush tax cuts when she cites a figure of “at least $1.4 trillion” out of an “about $3 trillion” cost of the full complement–suggesting opting for the Obama-desired portions only would save about half the cost.  The Congressional Budget Office’s analysis of the President’s budget published in March suggests the Obama-proposed permanent extensions of the “middle-class” portions of the Bush (2001 and 2003) tax cuts would cost $2.154 trillion over ten years, without interest costs, while the CBO’s earlier (January) budget outlook report showed the permanent extension of the entirety of the tax cuts would cost $2.567 trillion.  Even President Obama’s own budget acknowledges the upper-income portions of the Bush tax cuts that the Obama Administration is proposing to let expire would only save (relative to the full policy-extended baseline) $678 billion out of $3.097 trillion (which is where Lori must have gotten her “about $3 trillion” figure, but I’m still not sure where her $1.4 trillion figure comes from).

More later on this morning’s Hoyer speech and the excellent panel that followed and reemphasized some of these middle-path, reasonable strategies.

A month ago I participated in a conference of mostly military officials and national security experts–I was probably the “oddest bird” there–at the Naval War College in Newport, RI.  The title and focus of the conference was “Economics and Security: Resourcing National Priorities.”  I had planned on writing about some of the things I learned much sooner than this, but then the debates over economic stimulus versus deficit reduction got pretty hot and heavy, so I was otherwise preoccupied.

And then a funny thing happened.  I began to recognize there were quite a few parallels between the other fiscal policy issues I always write about, and this particular angle that I really have never written about:  the role of defense and national security spending in achieving fiscal sustainability.

First, I think most Americans (regardless of what they think of our wars and military activity more generally) assume that cuts in the defense/national security budget would weaken our defense capabilities–that a tradeoff exists between deficit reduction and a strong defense.  But what surprised me the most at the Naval War College conference was my learning that most of these national security officials and experts, who all advocate for a strong defense, believed that if the defense budget were tightened (and all seemed to recognize that given our fiscal situation, such tightening is inevitable), the quality of defense spending would actually improve.  There was a clear message–from even those in uniform(!)at this conference–that more binding budget constraints would force national security policymakers to better prioritize.  Instead of just trying everything, they would need to put scarce dollars where they would have the most benefit.  They would find it worthwhile to eliminate wasteful spending, and improved strategic planning would become more a necessity rather than just an option.  (I realize it is troubling that the human lives at stake are not a good enough reason for better strategic planning–but even there, financial incentives at the margin matter.)

Thus, there is not a tradeoff between adequately financing the military and reducing the budget deficit.  You don’t have to be either in favor of a strong defense OR in favor of fiscal responsibility–there is no “bright line” that separates those camps.  Just like there is no “bright line” between those who are concerned about adequately stimulating the recovering-but-still-weak economy, and those who want to improve the longer-term fiscal outlook.  In fact, in both cases, the seemingly opposing goals turn out to be more symbiotic (and even synergistic) than opposing.  I’ve made the point many times regarding stimulus versus deficit reduction, but here’s a new video by the Brookings Institution’s Bill Gale that explains this very clearly.  And on defense spending, one of the experts I met at the Naval War College conference, Carl Conetta of the Project on Defense Alternatives, served on the “Sustainable Defense Task Force” which recently issued this report–which emphasizes “a set of criteria to identify savings that could be achieved without compromising the essential security of the United States.”  Coincidentally, the report opens with these two quotes from two other experts I met at the conference, the Hoover Institution’s Kori Schake and the Center for American Progress’ Michael Ettlinger:

“Conservatives need to hearken back to our Eisenhower heritage, and develop a defense leadership that understands military power is fundamentally premised on the solvency of the American government and the vibrancy of the U.S. economy.”  –Kori Schake, Hoover Institution Fellow and former McCain-Palin Foreign Policy Advisor

“A country that becomes economically weakened because it has shortchanged necessary domestic investments and carries excessive levels of debt will also eventually be a weaker country across the board.  An overall defense strategy that is fiscally unsustainable will fail every bit as much as a strategy that shortchanges the military.” –John Podesta and Michael Ettlinger, Center for American Progress

The “sustainable defense” report presents a series of options which together would save nearly a trillion dollars from the defense budget over the next ten years.  That is a lot of money, why, getting close to half the cost of the deficit-financed extensions of the Bush tax cuts that President Obama has proposed in his budget.  (I wink a little here.)

And speaking of the Bush tax cuts proposed by President Obama (a very old topic here)… At the Naval War College conference, Carl Conetta educated me on the fact that on defense spending as well, President Obama’s policy stance looks very much like that of the (immediately prior) Bush Administration.  (See this report of Carl’s and note Figure 3 on page 3.)

Finally, like their fear on speaking up about wildly-costly but politically-popular tax cuts (and being accused of being for “big government” and the “largest tax increase in American history”), politicians are reluctant to touch defense spending as something that needs to be trimmed for the sake of fiscal responsibility, for fear they will be accused of being “soft” on national security.  So like the deficit spending we do on tax expenditures that are not successful in achieving their ostensible purposes, the deficit spending we do on wasteful or redundant defense programs tends to get a free pass because of the politics.  In theory, the fiscal policy and national security experts say there’s a lot of room to spend less money more wisely–and not just spend less money but actually strengthen the economy and strengthen our national security.  In practice, without more binding budget constraints or demands from the American public for policymakers to impose such constraints on themselves, there’s no incentive to actually get it done.