When $85 billion is Really Less than $10 billion

There's been lots of reporting and hyperventilating about the sequester, so imagine the sighs of relief that must have gone up when the Senate Democrats announced their replacement bill.  Of course, it being Congress (either House), the bill is not actually available in any public forum.  We do know the name of the bill - The American Family Economic Protection Act - but the text is not yet available.

This article at Business Insider seems to be the best summary of the bill I can find.  Let's review the bidding.  First, the sequester is expected to reduce spending by $85 billion this year (that's fiscal 2013) from what would otherwise be spent and therefore reduce the deficit by the same amount.  So how much does the AFEPA reduce the deficit this year?  Let's take the bill's provisions one by one.

1.  Defense

Defense cuts are not implemented until 2014 and are then simply capped at .5% lower than the caps that already exist in 2014 and beyond in the BCA.  So defense savings in 2013 are zero and deficit reduction in 2013 is zero.

2.  Agriculture

It gets a little bit harder here.  The bill summary claims it saves $27.5 billion net, $31 billion gross but doesn't say anything about two critical points - whether interest is included and when the additional spending happens.  So the best case is let's say 1/10 of $27.5 billion or $2.75 billion savings this year.  The worst case would assume interest savings are in the total and the new spending all happens this year (in my view the most likely case given Washington budget language) and the savings start in 2014.  In this case, the bill probably has savings about about -$3 billion this year, meaning it marginally increases the deficit.

3.  Buffet rule

The bill claims roughly $50 billion in savings from the Buffet rule.  Based on previous CBO scoring of the Buffet rule, this almost assuredly includes interest savings.  What is again unclear is what assumption is being made about implementation.  I've found things that say now and things that say 2014.  So best case here is about $5 billion in deficit reduction and worse case is zero.

4.  Other tax changes

They account for only $3 billion in total over 10 years so their one year impact is negligible in any event.

So in summary, the best case is that the bill reduces the deficit by about $8 billion this year.  The worse case is that it adds about $3 billion to the deficit this year.  Neither is anywhere close to $85 billion in deficit reduction this year.

Interestingly, both would push the deficit forecast this year back over $1 trillion.

The contraction in State and Local spending

I'm getting a little bit tired of reading about the state and local government contraction.  So I decided to look it up.  Here's the graph

So state and local governments are contracting by spending more.  It does make you wonder why people post things without looking at the data first.

There's no doubt that state and local government employment is down through the recession.  But spending is not down.  So that tells you that state and local governments prioritized other things over employment.  That may or may not be a bad thing but it's certainly not a contraction, at least as it is defined in the economic literature.

A Balanced Plan?

The White House is fond of arguing that our changes in fiscal policy should be "balanced" between tax increases and spending cuts.  As a recent example, see this from Dan Pfeiffer.  In it, Mr. Pfeiffer refers as an example of the President's notion of balance to his proposal to the supercommittee.  So I decided to take a look at it in a little bit more detail.

The conclusion was surprising even to me.  The way I would suggest the math is "fair" would score the President's proposal at $70 in tax increases for every $1 in real spending cuts.  I wasn't expecting balance but I was expecting more balance than this.  Let me tell you how I got there.

The President and his team present this as a "balanced" proposal over and above the savings from the Budget Control Act.  The administration provides a convenient summary of its proposal in Table S-6.

American Jobs Act - $447 billion
Mandatory Savings - $(257) billion
Health Savings - $(320) billion
Cap OCOs - $(1084) billion
Tax reform - $(1573) billion
Interest savings - $(715) billion

When I first looked at the table, I didn't think much of it but then I started reflecting on the word choice.

The first thing that occurred to me was the use of the word "savings" in relationship to what others might call spending cuts.  I started by assuming it was just a word choice thing but then I decided to go look at table S-4 where the specific programmatic recommendations are made.

Here are some of the components of "Mandatory Savings" and their sizes:

Increase government fees charged by Fannie Mae and Freddie Mac - $27.5 billion
Increase the passenger aviation fee - $15.0 billion
Raising Unemployment Insurance taxes - $33.0 billion
Recoup financial sector assistance (a tax one presumes) - $30 billion

So of the $257 billion in mandatory savings, at least $100 billion are tax or fee increases.  This ignores increased copays for Tricare and other things that are individual costs.  So roughly 40% of the "savings" are actually tax increases.

In the administration's defense, most of the health savings are actual spending reductions, the largest of which is negotiating drug prices for Medicare.

But now on to the big items, the capping of OCOs and interest.  Capping OCOs is nothing more than not spending money we never intended to spend.  For example, we save $135 billion in 2021 according to this logic but not continuing the wars in Iraq and AfPak until that time.  Is there anyone who seriously expects those wars to be going at the current pace in 2021?  This is an accounting gimmick and nothing more.

Which brings us to interest.  First, it's worth noting that the interest number includes reduced interest from the BCA as well as these new items rather than breaking out the interest as would be more honest.  But more substantively, including the interest savings as a spending cut in the notion of balanced is ridiculous since it would allow a package that was all tax increases to have 15 percent or so of the savings come from "spending cuts."  As I've argued before, interest should be reported separately as it is not a policy change but the outcome of various policy changes.

All of which brings us back to the President's past balanced proposal.  Here's a quick restatement.

Phantom spending cuts (aka cuts that are reductions in money we never intended to spend) work out to $1.1 trillion.  Real spending cuts work out to about $25 billion over 10 years (remembering the President proposed $450 billion in incremental spending).  Tax increases are about $1.7 trillion.  So if we leave the phantom stuff and interest savings out, it's about 70 dollars in tax increases for every dollar of programmatic spending cuts.  An interesting definition of "balance" for sure.

How much growth does it take not to "cut" spending?

Here's a nice quote from Speaker Pelosi today.

"The fact is we've had plenty of spending cuts, $1.6 trillion in the Budget Control Act. What we need is growth," Pelosi said in an interview on "Fox News Sunday." 

But of course, we know that spending in the latest CBO forecast is planned to grow 5.3% per year between now and 2023.  So we are to simultaneously believe that we are cutting spending by $1.6 trillion and growing it by 5.3%.  Of course, that 5.3% assumes the BCA caps hold through 2023, those same caps that the Congress is trying to get rid of for 2013 as we speak.

One is left to wonder how fast spending in Washington would have to grow before we would stop claiming credit for large spending "cuts."

Assume Everything Goes Your Way...

That's more or less my take on the current projections offered by the CBO.  To summarize and build on the work of William Gale

They assume:

1.  The economy reaches full employment/output by 2017 and stays there through 2023.  This both assumes rapid growth between now and 2017 and no recession or crisis between 2017 and 2023.  The budget outlook would markedly deteriorate were this not the case.

2.  Inflation remains low and (therefore) interest rates remain modest.  They CBO does assume a rapid climb in the real interest rate closer to historical levels (about 3%).  This would be welcome relief for savers but is consistent with the economic performance they are expecting.

3.  The savings in the BCA (the caps through 2023) hold, driving both defense and non defense discretionary levels to their lowest levels as a share of GDP since 1940 and 1962 (when tracking was started) respectively.  While, in my view, feasible and desirable, this is vanishingly unlikely.

4.  Health care inflation remains tame.  The CBO grandfathers recent trends in health care inflation into their forecast.  That's certainly possible but again it's an optimistic assumption given long term trends.

5.  The picture on the ACA does not deteriorate further and certain long term assumptions hold.  Among the assumptions in the ACA are the cadillac tax, the number of people in the exchanges, and the reduction in exchange subsidies beginning, I believe, in 2018.  Again, these are all optimistic assumptions.

And under these scenarios, the budget picture remains basically unchanged.  The debt to GDP ratio at the end of the period is slightly higher than it was in 2012.  The deficit is above 3 percent of GDP and nearly back to a trillion dollars.

I spend most of my time in business.  If you're presented with a plan that assumes everything has to break your way in order for you to move sideways, you know you are in trouble.  We are definitely (still) in trouble, despite about a 1 percent of GDP increase in tax receipts (between the ATRA and the end of the payroll tax holiday).

Real Budgeting is Still Better

As promised, I've updated my "real" budget projections on the basis of the CBO forecast that was just released (more observations from the CBO report coming up soon).  A quick summary of the assumptions and findings follows below.

Critical Assumptions

• Spending for each budget category grows at the relevant rate of growth of inflation and population.  Thus, Medicare spending grows at the rate of medical inflation (3.2% over the last 5 years) and the over 65 population (each year as projected by the Census)
• Tax receipts are as assumed in the CBO forecast
• Interest expense is calculated based on public debt and effective interest rate calculated from the CBO projections
• OCO spending assumed to decline to $50 billion and remain there
• Disaster spending rebased to $20 billion in 2013 and beyond
• Discretionary spending, Medicare, and Medicaid assumed to become 10% more efficient over the decade
• UI spending rebased to full employment economy per the numbers in the CBO forecast

The net effect of this is that all major class of spending grow, albeit most grow more slowly than in the CBO baseline forecast.  Medicare for example, grows at 5.3% per annum on average (including efficiency effect).  Defense (including OCO spending) grows at 0.4% per annum but continues to grow in nominal terms.

Meanwhile, revenue is projected to grow at 6.2% per annum.  The combination of these results in a rapid and continued reduction in deficit spending versus the CBO baseline.  I summarize the results in the two charts below.  First, we'll look at deficit to GDP ratios.

The basic change here comes in the medium and long term.  In the CBO forecast, the deficit picture deteriorates dramatically in the latter half of the forecast.  In the "real" baselines, the deficit picture continues to improve to 2023 ending the period nearly 300 basis points better as a percentage of GDP.

Not surprisingly, the debt picture is similar.  Instead of improving and then getting worse as in the CBO forecasts, the "real" budget picture continues to improve over the entire course of the forecast.  So the learning here remains.  A more restrained view of the growth of federal spending can dramatically improve the budget picture without making any major changes to the revenue side of the equation.

The Fallacy of Causation and Solution

This post from Kevin Drum is a good example of one of the fallacies that seems to be making the rounds these days.  In the body of a typical argument about why Republicans are unserious on the deficit (true for most in my view), Kevin makes the following argument.

It's all healthcare, baby. If all of the pressure on the deficit were being applied to serious proposals for reining in healthcare spending, in an effort to get U.S. spending levels down to those prevailing in socialist Europe, I'd probably applaud. 

So the solution to the deficit is all about healthcare.  You can see similar arguments popping up all over the left blogosphere.  Mostly, as in this case, these are arguments for universal health care but leave that aside.  The point is that they represent a fallacy, the fallacy that if A is the cause of a problem then a change in A must be the solution.  Certainly we can look at changing A (health care) but there's no particular reason that changes in A must be the answer.

To make the point, let's take a look at taxes and spending relative to 2000 (the last time the budget was balanced).  I'm going to look at this in two ways.  First, I'm going to look at effective tax rates across the income distribution (similar to my previous post comparing to 1979).  Using the same TPC and CBO assessments, one gets the following picture.

So, relative to the last time we had a surplus, effective federal tax rates in 2013 are projected to be lower for every income group except for the top 1% where rates are projected to be 3.4 percentage points higher than they were in 2000.

By the Kevin Drum logic, I should therefore cut the tax rates of the top 1% and increase the tax rates of everyone else since that would be the way to correct the problem by addressing the changes that led to the problem in the first place.  I rather doubt that Mr. Drum or his intellectual comrades would be in favor of this approach.

We can of course extend this thinking by looking at the spending side of the equation.  In 2000, spending on domestic discretionary programs was 3.0 percent of GDP.  In 2011 (2012 is not yet available), these same programs consumed 4.3% of GDP.  Should we therefore cut these programs by 30% in nominal dollars?  I rather doubt this is the plan that would be embraced by Mr. Drum.  Indeed we know this is not the case since "It's all healthcare, baby."

The point here is not to argue that addressing healthcare isn't an important part of our long term deficit picture but rather to argue the fact that healthcare spending has increased and will continue to do so does not imply that the only (or primary) solution is to reduce or slow the rate of growth of health care spending.  The prescription may or may not be right, the logic is not.

The Varying Meanings of "Fair Share"

I had what may be a bit of an epiphany this morning about why I can never understand the arguments that the President and others make for the "rich" paying "their fair share."

When I hear those words, I always think of their fair share of the federal tax burden of the country.  Because I think of it that way, I tend to look at tax distribution tables as a way to think about the question of fairness.  Because of changes in income distribution, I don't look at the distribution directly but rather I look at the change in total effective tax rates over time.

Here are two views of the comparison between 1979 (the first time CBO did the analysis) and 2013 (post the ATRA).

So we can look at this two ways, either in terms of the change in effective tax rate in percentages or percentage points.  In percentage points, effective Federal tax rates have declined by 6.1 points at the bottom of the income distribution and 0.6 points at the top of the income distribution.

In percentage terms, the comparison is directionally the same but an even larger order of magnitude.  Yet, despite these numbers, many maintain that the "rich" aren't really paying their fair share.  So my thought this morning was that maybe those who make this claim are not referring to fair share of the total tax burden but instead to fair share of their income, regardless of how much others are paying.

This seems a rather odd way of discussing fair share but it's the only one that makes any sense in light of the underlying data.  Now if only they would let us in on what the magical fair share of income is....beyond "higher" I mean.

On the meaning of spending "cuts"

Have a look at this framing of future spending from the TaxVox blog at the Tax Policy Center.

Ryan’s promise to balance the budget in a decade with no tax increases implies cuts in federal spending unseen since the U.S. disarmed after World War II. Most lawmakers are horrified that the automatic spending cuts now scheduled for March would cut military spending by 9.4 percent and domestic spending by about 8 percent. (And note this so-called sequester would exempt Social Security and Medicaid as well as Medicare benefits from any cuts).

So I got to wondering about the nature of this "cut."  And I wanted to go back to the earlier post I had done on balancing the budget.  If you recall, I ended that post asserting that we would be running a deficit of about 1.2% of GDP assuming:

1.  We grew spending at the rate of growth of inflation plus relevant population

2.  We asked government (ex-transfer payments) to improve efficiency by 10% over a decade.

3.  We eliminated spending on the wars and brought "automatic stabilizers" back to their non-recession levels of spending.

So I wanted to revisit the draconian cuts argument.  In point of fact, the tax increases passed at the beginning of this year account for an improvement in the picture of about 0.4% of GDP so that would take our 1.2% of GDP deficit down below 1%.  So, if we did nothing more than have government grow "base" spending at the rate of inflation plus population, we'd get the deficit down under 1% of GDP by 2022 and on a trend to balance within a few additional years.

I'd also point out that the statement from the TPC is factually incorrect.  Let's say we reduced spending from current levels (22.8% of GDP in FY2012) down to the 19% that will be collected in taxes under current law by 2022.  That's a reduction of 3.8% as a percent of GDP over a decade.  From 1990 to 2000, spending as a percentage of GDP fell by 3.7%.  From 1991 to 2001, it was pretty much the same.  The comparison to WWII is highly inapt.  From 1944 to 1954, spending fell by more than 20% of GDP.  What the Ryan budget would set us up for is something like the 1990s and nothing like the period 1945 to 1955.  You'd think the folks at TPC would know better.

Is Paul Ryan the Only Keynesian Left?

I found this post at the always good TaxVox blog interesting.  It lays out the positions of the parties on reducing the deficit.  It contrasts the position of Paul Ryan (who wants to balance the budget within 10 years) with Democrats who seem to be focused on a stable debt to GDP ratio.

The Goal Line. But Democrats and Republicans don’t even agree on the goal line in this game. While Ryan wants balance in a decade, Democrats are not thinking about balancing the budget at all. Their aim: Stabilize the debt so it does not grow faster than the economy. This would set the ratio of debt to Gross Domestic Product at about 73 percent.

To return to the question I asked before.  How does Keynesian thinking allow for "stable debt to GDP" to be a target over a 10 year period of time?  Is it A) that economic cycles are now 20+ years long and therefore we are running deficits during the down side of the cycle to be offset by surpluses in the good side of the cycle or B) that liberals have surrendered the ghost of Keynes and the through cycle target is now a deficit to GDP ratio of 4 to 6% (the nominal through cycle GDP growth rate)?

It certainly looks like the latter.  So perhaps Paul Ryan is the only Keynesian left.  Wouldn't that be an interesting turn of events?

How the Mighty Have Fallen

Well, it's official.  Keysianism has jumped the shark.  I think it's worth reviewing the bidding here.

If we go back to the original theory of Keynes, yes there was deficit spending but it was supposed to be largely offset by running surpluses during good times.  Thus, through the entirety of an economic cycle, the debt was supposed to remain roughly flat.  In other words, under the original theory, while there would be deficits in any given year, there wouldn't be much debt accumulated over time.  In other words, the target deficit on average through an economic cycle was zero.

Several years ago, the terrain began to shift and budget theorists and politicians began to talk about the notion of "primary balance."  This notion is simple, namely that the budget is in balance with the exception of debt service.  What this means is that the budget deficit is equal to or lower than interest on the debt.  Since interest payments currently run about 1.5% of GDP, the notion of primary balance would imply running deficits under this level.  Note, this notion abandons a balance through cycle and proposed continued perpetual deficits, but small ones.

More recently, we've abandoned that notion as too restrictive and now begun to argue that deficits are fine as long as they don't grow the debt to GDP ratio.  Now this is even a higher standard of how much deficit is good since GDP generally grows faster than the 1.5% that current debt service accounts for.  This latter standard is the standard that is commonly in use among more liberal economists today such as Paul Krugman or the CBPP.

But until recently, I thought primary balance was a through cycle view just like the original Keynesian view.  But, based on this piece by Dr. Krugman today, I'm beginning to understand my error.  Krugman writes

Recently the nonpartisan Center on Budget and Policy Priorities took Congressional Budget Office projections for the next decade and updated them to take account of two major deficit-reduction actions: the spending cuts agreed to in 2011, amounting to almost $1.5 trillion over the next decade; and the roughly $600 billion in tax increases on the affluent agreed to at the beginning of this year. What the center finds is a budget outlook that, as I said, isn’t great but isn’t terrible: It projects that the ratio of debt to G.D.P., the standard measure of America’s debt position, will be only modestly higher in 2022 than it is now.
The center calls for another $1.4 trillion in deficit reduction, which would completely stabilize the debt ratio; President Obama has called for roughly the same amount. Even without such actions, however, the budget outlook for the next 10 years doesn’t look at all alarming.

So in the view of Paul Krugman and the CBPP, it's OK to do nearly nothing because the debt to GDP ratio (proclaimed the standard measure of the US debt position) will not increase very much between now and 2022.

But let's take a look at what the CBO expects from the economy over the 10 year period...in short rapid growth, full employment and low inflation for about 8 of the 10 years.  So the new standard is that slowly growing the debt to GDP ratio in an era of full employment is OK.

We've gone from saying we should run a surplus (Keynes) in good economic times to saying that it's OK to run a deficit of 3 or 4% of GDP, a rate that has rarely been seen outside of wars (Krugman).  My how the mighty Keynes has fallen.  One almost wonders whether he'd recognize himself in his newest incarnation.

Almost but Not Quite

Well, House Republicans are getting closer.  They've figured out that they need to pass a debt ceiling increase but they haven't figured out how to do it yet.

When you compare their approach to what I've suggested, you'll see two key deficiencies in their proposal.

1.  There's no principal behind the budget increase.  Validating the principal of raising the debt ceiling to cover committed funds is important and something that is clearly missed in the three month extension.

2.  Pushing the Senate to pass a budget resolution is a good idea but the enforcement mechanism (withholding pay) does nothing to ensure future debt ceiling increases proceed apace.  Rather tying future increases to the deficits in the budget resolution ensures a long-term solution to the problem as well as a short term one.

Congress is losing the opportunity to reform the way we design and execute the debt ceiling.  This is an opportunity that should not be lost.

A Potential Solution to the Debt Ceiling

I'd like to take one argument that I have heard a lot of folks, particularly on the left make, and use that to make an argument about how we might manage the debt ceiling.  First the argument and what I think is wrong with it.  You can find a simple version of it here.  Trying to ignore some of the invective, the crux of the argument is:

Obama has said he will not negotiate over the debt ceiling increase.  Good…I hope he sticks to that, because the debt ceiling shouldn’t be something that ever needs to be negotiated.  It shouldn’t even need authorization by Congress, it should simply be required that the U.S. Treasury have the capability to always pay the bills that Congress has already authorized.  The “trillion-dollar platinum coin” issue has been making the rounds as an option for Obama to bypass Congress if the GOP continues to play with economic disaster by making the debt-ceiling a political football. 

Now, the part of this statement is true is that Congress has already authorized spending that will push us above the debt ceiling but, in point of fact, it hasn't authorized very much, probably less than $300 billion.

1.  The Senate has not proposed and Congress has not passed a budget in more than 3 years.  Thus, there is no agreed upon spending blueprint for FY2013.

2.  The government is currently being run via a series of continuing resolutions.  The latest CR expires in March of 2013

3.  Assuming Secretary Geitner was correct that we hit the current ceiling on 12/31/12, this means that Congress has agreed to run the government for about 3 months post the passing of the ceiling.  Leaving aside timing effects, this means that the government would have about 1/4 of the annual deficit of say $1.1 trillion or about $275 billion to cover.

So yes, the government has agreed to spend $275 billion above the debt ceiling but not more than that.  Thus, the argument made by so many only justifies raising the debt ceiling by $275 billion.

However, there's the germ of a solution in the overall point.  I'd propose that Congress do the following.

1.  Immediately raise the debt ceiling by $275 billion dollars in what is called a "clean increase" of the debt ceiling.

2.  Attach an increase in the debt ceiling of whatever amount is required to the CR that much be passed prior to March 27.  In my view, I would increase the debt ceiling by 110% of the projected deficit created.

3.  Require that a debt ceiling increase be attached to each house's budget and that budget resolutions were the only way to raise the debt ceiling.  Thus, when each house passed its budget it would also be passing an increase to the debt ceiling and budget bills would be required to be passed, else the debt ceiling could not be increased.

4.  Finally, require a "true up" process at the end of every year.  That is, the ceiling could be adjusted for variance from projected costs and revenues but "only" for technical projections.  This could be done during the following year's budget process.

The consequence?  Well, the House, Senate and White House would have to agree on a budget (in order to increase the debt ceiling) and that increase would already be baked into law.  We might have to do some true ups when the economy tanks or thrives but, over time, those should cancel each other out.

Of course Congress would hate this because they'd have to pass a budget and they'd have to raise the debt ceiling showing how much debt they were adding every year.  But wouldn't this be much better approach to it than the current mess?

The (Not Quite) Worst Deal Imaginable

Well, I can say this for the current fiscal cliff deal.  It is not quite the worst deal imaginable but it does come close.  Here are some immediate and top of mind reactions.  I reserve the right to change some of these as more of the details come out but for now I think I can stick with...

1. It's mostly a "small" tax increase bill.  The net tax increase is being reported at about $600 billion  over 10 years.  That averages $60 billion a year against deficits that look like they are going to be in the $1 trillion plus range for the foreseeable future off of this baseline.  So we should prepare for our fifth straight year of deficit spending greater than a trillion dollars and 7% of GDP.
2. It gives away some of the benefit of "tax reform" before we've even gotten to tax reform.  It's hard to find exact estimates but the PEP and Pease changes probably raise about $100 billion or so in the 10 year window.  That's $100 billion of the $800 billion or so that has been discussed in "tax reform" discussions.
3. It makes a future "grand bargain" much, much harder.  The notion of a "grand bargain," that is tax increases for spending cuts was always a decent idea in the context of Washington but it would appear that idea is all but dead.  There's just not much one can do on tax increases now without increasing taxes on the middle class and thus the math of a grand bargain is simply not going to work.
4. It smells like a spending increase relative to the baseline.  The only report I've seen says "net" spending reductions are $15 billion.  But Congress includes reduction in debt service as a spending reduction and likely is using current policy as the baseline.  Thus, the debt service change (probably $60 to $90 billion of the $600 total) is probably counted as a spending cut meaning that spending, ex-debt service, most likely increased.

So is there anything good about the bill?  I can only come up with two things.  First, the reported permanent indexing of the AMT to inflation is a really good thing.  Assuming that stays in, it's a positive change from our perpetual patching process.  Second, the continuation of UI benefits is, from my perspective, also a good thing.  We can debate the merits of the UI system but putting some money in the pockets of people who have been employed is a good thing until we figure out a better unemployment system.  Sure it costs $30 billion but we could easily make that up somewhere else if we really wanted to.

And that's pretty much all she wrote.  Can kicking continues and looks like it's going to continue on pace for the foreseeable future.  There will be a lot of griping on both sides but in my view, Washington is simply incapable of dealing with the debt problem we have.  This latest event simply sheds more light on their (and our) dysfunction.

How to be Irresponsible

It's a bit rare that I cross post here but this post from Christopher Demuth is worth reading in its entirety.

In a nutshell, it exposes the loss of focus of both Keynesianism and supply side economics.  Both have been subverted by the political process into a force for moving consumption to today and costs to the future.  In effect, we have a political process that competes for how to be irresponsible as opposed to whether to be.

Which brings me to the current fiscal cliff debate, the perfect incarnation of the how to be irresponsible discussion.  On one side, we have the Democratic party which is asserting that tax increases on 2% of households and (small) unspecified future spending changes will be sufficient to avert the fiscal crisis we face.

On the other side we have the Republican party which is asserting that future unspecified (but larger) spending reductions are sufficient to address the crisis.  I mean, look at these plans in context.  Over the next decade, we plan to spend about $45 trillion and tax about $35 to $40 trillion.  And our tax and spending plans amount to a change of $2 trillion or so in total, a 2.5% change from the most unbalanced place we've ever been.  And that's DC's version of difficult choices.

And that's the debate...a debate about how to be irresponsible...about which irresponsible ideology will prevail.  Unfortunately, regardless of the outcome of the debate, the future is the same.  We run up debt until we can't anymore.  At that point, some combination of future taxpayers and asset holders get well and thoroughly screwed.