Yesterday, the House passed the fiscal year 2014 omnibus (1,582 pages) appropriations bill, by a vote of 359 to 67.  This came after the House passed a three-day continuing resolution to give the Senate time to consider the full bill.  It now appears close to certain that the government will be funded without another shutdown until at least October 1.

Whenever the Congress passes such a massive bill, there is a chance of Blog20140116mischief.  There are inevitably small details that are tucked away out of immediate view.  Some of those have come to light already, but others might show up only after the bill has become law.  The fraternity of people who can read appropriations language is fairly small, and they are in overload this week.  So be prepared for news flashes several days or even weeks down the road.

A detailed summary of this large book would fill a medium-sized book.  To generalize, however, it is best to start with the reality that a compromise that passes a politically divided Congress will be, well, a compromise.  Each side will get some things and give some things.  In the broadest terms, the Democrats got more money for domestic spending, and the Republicans (in addition to some relief for the Pentagon) got restrictions on how that domestic funding may be used.

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In a “normal” even-numbered year, the Congress gathers in early January, forms a circle, engages in a team grip and lets out the school cheer, and then disperses back home until State-of-the-Union and budget time a few weeks hence.  That time away leads many to conclude that being in Congress is a part-time job at a full-time salary.  Well, personally, I would disagree.  Most Members whom I have known used that kind of time to seek out their constituents and ask of their concerns, and to update their policy portfolios and ideas.  Just like in other walks of life, time for responsible legislators was the most precious resource, and they used it wisely to do their jobs better and improve the lives of the people who hired them.

But what the Members did individually longer ago than I care to admit, and what the institutions do today, are two different things.  Politics is played here in Washington, and issues are to be exploited, not resolved.  So no big surprise, but the Congress must return to the field and complete a long list of unfinished business.  That’s what you get when you procrastinate – you lose your time off and instead must do the work hitherto ignored.  So instead of asking you about your concerns or dialing an expert about the issues, the Members are dialing for dollars (well, at least they are talking to you) and hanging around the Washington office waiting for the votes to close out the previous year’s business.

(On the subject of procrastination, did you ever hear about the Philadelphia (my old home town) Procrastinators Club, who back in the nation’s bicentennial year of 1976 decided to address the cracking of the Liberty Bell?  The English firm that cast the bell was still in business, and so the club fired off a letter, citing the obvious manufacturing defect and demanding redress.  Well, the English firm clearly recognized and respected its responsibility to its customers.  Absolutely, they replied, we stand behind our work and our warranty.  Just return the bell in its original packaging…)

The Congress has left a lot of unfinished business, but there probably are three items that are most noteworthy to CED.  One is the annual appropriations for the ongoing fiscal year (2014).  As we discussed earlier, the leaderships of the two parties in the two chambers at least have agreed to an overall appropriations total, but now they and their Members must agree to specific legislation to fund the various agencies within that total.  Signs to date are encouraging but not conclusive.  More on this effort likely will follow at some future date.

A second bit of unfinished business is the impending collision with the debt limit.  The statutory limit has been suspended, but will return to full effect on February 7, with the new limit set at the amount of debt actually incurred as of that date.  In other words, immediately upon February 7, the Treasury Secretary must resort to his statutory authorities, aka “extraordinary measures,” aka “tricks,” to raise cash so that the federal government can pay its bills without “borrowing” in the strictest statutory sense of the term.  Debt limit crises, a comparatively recent phenomenon, are extraordinarily dangerous.  I hope that we will have no further occasion to talk about them over the next two months.  But I fear that we will.

The third item near the top of the unfinished fiscal agenda is unemployment compensation extended benefits.  Under normal circumstances, unemployment benefits are paid for a maximum of 26 weeks.  In periods of high unemployment, when jobs are harder to find, there is an automatic trigger to extend the availability of benefits by 13 or 20 weeks, which varies by the conditions in particular states.  However, that trigger is widely considered to be imprecise, and so in the worst of times the Congress is likely to act on its own.  Benefits were available for a maximum of 99 weeks (based on the unemployment rate in each state) up until the end of last year, when the extension expired and the duration reverted to prior law.  When the December appropriations deal was voted upon, awareness of its omission of action on extended benefits was just arising.  Despite a note of protest, the appropriations deal passed, and the Congress went home for the holidays and extended benefits expired.  Now, the Senate is debating another temporary extension of benefits, after which (assuming passage) the issue will revert to the House.

What is the right decision?  As a recent conversation among CED Trustee members of our Fiscal Health Subcommittee confirmed, this is a many-faceted and hard nut to crack.

A former governor was asked in a private conversation almost 30 years ago on what issue he believed he had spent insufficient time during his tenure.  He answered without hesitation: prisons – and added that he believed every other former governor would say the same thing.  If you were to ask economists to name an under-researched and under-debated topic, you would not get the same measure of unanimity; but I believe that many, upon reflection, would say unemployment compensation.  (Another candidate would be state and local government pensions.)  Unemployment insurance (we’ll use UI henceforth) is the first program that economists will mention when trying to explain government’s arsenal of anti-recession programs – what we call “automatic stabilizers.”  And yet, although a small group of scholars have done careful work on the intricacies of the program, that research is rarely discussed.  UI is a joint federal-state program – and so to a great degree each level of government believes that the other is minding the store, and for that matter intelligent action to improve the program would require time-consuming coordination; and so neither thinks about the program much.  UI does not scream for the spotlight, because it does not cost as much as the Medicare, Medicaid, and Social Security programs, and it cannot be said to contribute to the long-term budget problem like those others do.  And because UI attracts attention only during an economic downturn – when by definition it is too late to correct any structural flaws for that episode – there is a fix-the-roof-when-the-sun-is-shining problem.  To borrow an off-the-cuff line from Nobel-winning economist Robert Solow, it is the kind of problem that the policy system tends to try to fix for the crisis after next.

The basic rationale for UI could be expressed in two parts.  First, gump happens.  People lose their jobs, sometimes through no fault of their own, and it can take time to find new work.  In the interim, they and their dependents need to keep body and soul together.  UI benefits replace a fraction, on average perhaps one-half, of prior wages (with a low benefit cap that severely constrains benefits for comparatively high-wage workers) to achieve that goal.  Second, because looking for work can take some time, perhaps particularly for people with specific skills, UI can buy time to complete a thorough job search.  Without UI, a theoretical physicist might have to choose between letting his or her family go hungry and driving a cab.  To avoid having a lot of theoretical physicists driving taxicabs instead of working in the lab, we provide UI; and to the extent that this example plays out in the real world, the economy is better off in the long run.

That is one side of the coin.  There is another.  Some are concerned about the moral hazard associated with UI.  The availability of UI benefits can allow people to collect benefits instead of accepting an available job – even if that job is a good one that fits their skills.  Employers report interviewing candidates only to hear that the interviewee wants only to have a form checked indicating he or she actively looked for work so as to remain eligible for UI benefits.  Or candidates can respond to an offer by saying that they would prefer to report for work several weeks or months down the road when their UI benefits run out.  Theoretically, there is little doubt that extending unemployment benefits will increase measured unemployment (although as in the theoretical physicist example, some of that effect might ultimately be beneficial).  A leading research paper in this field estimates that every additional week of eligibility for UI benefits increases the average duration of unemployment by about 0.15 weeks (referenced here).  And researchers from the Federal Reserve Banks of Cleveland and San Francisco have summarized their work to suggest that the extended benefits now available under federal legislation increase the unemployment rate by up to, but probably less than, one percentage point.

The data do indicate that large numbers of persons who exhaust their unemployment benefits then cease to be unemployed – suggesting that those persons had been postponing accepting a job so that they could continue to collect benefits.  However, unfortunately those data do not separate those persons who accepted a job that had previously been offered from those who still could not find work and simply dropped out of the labor force.  One study compared the duration of job search among workers who were on unemployment insurance, on the one hand, with the duration among others who were not eligible for UI (including new entrants or re-entrants into the labor force, for example), on the other.  That research found that UI beneficiaries had longer periods of job search – but not by much.

There surely are people of limited ambition and responsibility who prefer to go through the motions of a job search while to the maximum possible degree enjoying leisure and collecting UI benefits.  But there certainly are others who are enduring heartbreak in a desperate search for work, and whose families are hurting financially.  Do we govern for the exception, or do we govern for the rule?  And which is which?

(I appeared on a radio call-in show during the last days of congressional debate over the Tax Reform Act of 1986, when the major outlines of the final legislation were fairly clear.  One caller was a woman who said that she had routinely high medical bills, and who was upset that the new law would allow the deduction of medical expenses only in excess of 7.5 percent of income, whereas the prior law had allowed the deduction of expenses over 5 percent of income.  She was unhappy because she would receive less tax relief for her medical bills.  Meanwhile, the law increased the personal exemption that all taxpayers received, and the standard deduction received by taxpayers who did not itemize.  All of those provisions, taken together, provided a net tax cut for most taxpayers; and the increase in the standard deduction, to the extent that it allowed taxpayers to pay less tax without itemizing their deductions, provided a significant simplification to those taxpayers.  Was that combination of changes in the law an example of a meritorious achievement of the greatest good for the greatest number?  Or was it an unfair imposition on the few taxpayers who faced an unusual but painful circumstance?  This is an example of the kind of calculation that public policy must make in almost countless instances – including in decision-making on unemployment compensation.)

Today’s economic circumstance is unprecedented in our lifetimes; we have endured the deepest recession since the Great Depression, whose collateral damage has hindered the subsequent recovery.  The job market became so weak in some localities that large numbers of people found job search fruitless, and ultimately dropped out of the labor force (see the following chart).  (One indictment of UI is that it has encouraged people to refuse job offers, and so has made unemployment and the labor market look worse than they really or potentially are.  Technically, however, to collect UI, people must engage in job search, and therefore would not be counted as having dropped out of the labor force.) Blog20140109

This downturn has been felt disproportionately in several geographic regions of the country, fairly clearly identified by collapses in housing values.  Imagine a family whose breadwinner has lost his or her job in a locality where the worst of the housing bubble has crushed business conditions broadly.  There is no work in the unemployed person’s field, not much in other fields, and for that matter, there are experienced and unemployed persons in just about every field, so job training (such as it is, which is one of the greatest shortfalls of government) and a change of career are not the answer.  So the family might want to relocate to find a job – but the family’s home mortgage is underwater, and so they cannot move.

The federal government has taken action by extending unemployment benefits fairly broadly (with some targeting by the state unemployment rate – which has become an imperfect indicator of the condition of a state’s economy, because the widespread exits from the labor force distort the measured unemployment rate).  In the worst labor markets, and for families in the extreme Murphy’s Law, Catch-22 kind of circumstance just described, that would make sense.  Those people could hunker down and keep looking for work until the housing market and the local economy improve.  But to the extent that federal action continues very long durations of benefit eligibility – as of last year, almost two years – in local labor markets that are stronger, people who look seriously for work would have a good chance to find it, and so the greatest practical effect would be to tempt others to refuse job offers and collect benefits for long periods of time.

So what is the right policy response?  We might leave the decision up to the states.  Let each state decide whether its labor market is weak enough to justify continuing extended benefits.  That would work in one dimension, but the states with the weakest labor markets are by definition those with the least ability to pay to extend benefits.  One reason for an at least partially national unemployment system is that it allows the sectors of our diverse economy that are strong in any particular economic cycle to help to foot the bill for the recovery of those sectors that are weak – knowing that the tables might be turned in the next recession.

So perhaps we could have federal action, but delineate it more sharply based on the condition of each state, with more help for those whose labor markets are weak, and less help for those that are strong.  But such an approach raises its own challenges.  Beyond the fact that our labor market indicators are deranged by this unprecedented downturn, the Congress always has had difficulty with the distribution of aid among the states.  It might be the right thing for a legislator to step forward and volunteer that his or her state or district does not need help.  But that would not be a good way to begin the campaign for the next election.  Every state or district has some people who are unemployed and cannot find work.  As an elected representative, to suggest that your constituency is not in need is to belittle those voters, and their friends, and their communities.  That is part of the reason why the Congress never has had much success at the kind of geographically compensatory programs that you would think would be a key responsibility of the federal government of a large and diverse nation, and why such “formula fights” usually boil down to a relative uniform distribution of support regardless of the real diversity of need.

In sum, this is a complex issue with weight on both sides of the scale, in terms of both the nature of the problem and the likely success of the alternative remedies.  Where people come down will depend upon their policy judgment, and also their local circumstances and personal values.  We might want to think now about longer-term structural improvements – but the long-term forecast is that once it stops raining, the sun will shine again, at least for a while.  Maybe for the crisis after next.

There is muddling through, and there is kicking the can down the road.  Although neither is conclusive, the former is more purposeful.  The budget deal announced yesterday – the “Bipartisan Budget Act” – challenges judgment with respect to its classification between these two pigeonholes.

There is some good news here.  The press has reported that the deal eliminates the risk of a government shutdown either this year or next.  That is not correct, at least not literally.  The government will shut down on January 15, 2014, and then again on October 1, 2014, if the Congress does not pass, and the President does not sign, appropriations bills (in addition to this deal) to keep the government funded and open.  However, unless and until this deal becomes law, the two Appropriations Committees of the Congress do not have the agreed-upon targets such that they can even try to pass those bills.  There are indications that the Appropriations Chairs have had significant input to the numbers in the deal, and that those Chairs are therefore now prepared to write those bills.  If so, then we are at least positioned to avoid government shutdowns, even though we have not yet done so.

The economy is shaky enough that it really does not need another shutdown shock.  Making a real step toward avoiding a shutdown crisis (although not fully accomplishing that goal, which this piece of legislation could not possibly do) for the next 22 months is clearly a positive.  Chalk one up for the Bipartisan Budget Act.

Also give the negotiators credit for standing close enough together to fit in one television shot.  Very little has been accomplished or even attempted on a bipartisan basis in Washington in recent months and years.  Budget chairs Ryan and Murray will catch a fair amount of flak within their own parties for even appearing to work together, so kudos on this front too.

Furthermore, the deal provides some relief from the budget “sequester” in this fiscal year and next, which are arguably the worst-affected years in the next eight that are covered by that irrational budget mechanism.  There is plenty more pain and irrationality to come in succeeding years – and even with the sequester fix these two years are not great either – but still, this relief is unquestionably welcome.  The deal “pays for” that sequester relief with savings that will arrive later, and this timing makes sense from the point of view of managing the nation’s macroeconomic policy.  So that is another positive.

That said, do not forget that the potential January 15 shutdown was not the only pending early-2014 crisis.  We go on debt-limit watch again on February 7 – and the debt limit is a more malignant issue by far than a government shutdown.  As an Act of Congress, this deal, at least in theory, could have increased the debt limit and taken that risk off the table.  It did not.  This is not to lay personal responsibility on the budget-deal negotiators; they may not have been given a green light on the debt limit by their leaderships.  But failing action in the budget deal leaves the larger dark cloud hanging over the economy, even while it dissipates the smaller.  You certainly should enjoy your holidays, but please do not put your guard down just yet.

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“Rumors” is a bar in Washington, D.C.  (Never been there.)  Rumors are also all we have to go on in anticipating a deal coming out of the budget-resolution negotiations this month.

The rumor is that a deal is relatively close, but still not in hand.  That makes life a bit tricky for those outside the room.  Virtually the entire purpose of this negotiation is to settle upon a number for the total annual appropriations – a so-called “302(a) allocation” – for the ongoing fiscal year (2014).  This is small ball, not a grand bargain.  By the ideal-world calendar, the appropriators would have received that total number on April 15, and that entire process would have been finished on September 30,.  So now, instead of the appropriators receiving their target five and one half months before the fiscal year, they are waiting for the number two and one half months into the fiscal year.  (No pressure, guys.)

Why is that a problem?  The toughest annual appropriations decisions are those over the last few dollars.  And it is virtually impossible even to prepare for those decisions if you do not know even to a close-enough-for-jazz tolerance how many last few dollars there are going to be.

But beyond that point, the appropriators’ ambition this year was to do legislation a little more tailored than a last-year-plus-or-minus-X-percent across-the-board full-year continuing resolution (CR), which has been the highly unfortunate recent pattern.  Even those most viscerally opposed to government as an institution should reject that approach, and instead want appropriations laws that dig much deeper – that perform “oversight” to weed out and disproportionately cut or repeal the least-cost-effective programs.

At least to take a crack at such meaningful legislation, the appropriators asked for their 302(a) allocation to be determined by about a week ago.  Without that number in hand, and with the current CR expiring on January 15, the chances of further short-term CRs and still-later final appropriations legislation are increasing by the minute.  And the shorter the duration of any real appropriations legislation, the less the potential beneficial impact of any well-chosen adjustments, the harder for well-meaning executive branch managers to do their jobs, and the more-abrupt any changes of appropriations levels need to be to hit an annual total much different from the annual rate of the initial part-year CR.

But it is not dreadfully surprising that the budget-resolution negotiators are having a hard time delivering their final numbers.  The substantive preferences of the House and the Senate have little in common.  And especially in the House, but even in the Senate, there is considerable diversity of opinion within the majority.  A deal cut by the House majority’s negotiator could be rejected by his own caucus and so rendered null, void, and an enormous waste of time and loss of face.  Therefore, the negotiation entails frequent consultations with the leaderships and at least indirectly with the full caucuses, which itself takes a lot of time.

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One of the best-ever economist jokes has three econometricians out deer hunting.  They encounter a deer, and the first econometrician takes his shot and misses one meter to the left.  Then the second takes his shot and misses one meter to the right, whereupon the third begins jumping up and down and calls out excitedly, “We got it!  We got it!”

By latest accounts, the current budget conference committee is giving a fair impersonation of those three econometricians, aiming both too high and too low.  They are acting as though this game were on the level (that is another joke for another day), and therefore are trying to produce some real product.  But being incapable in these circumstances of producing something truly real, they are faking it.  The result may turn out to be a substantial disappointment, though it may still turn off the pending appropriations and debt-limit crises – which would be sufficient reason for all of us to turn Washington off for a few weeks, and enjoy the holidays.

Back in August of 2011, the Congress and the President escaped an already far too close brush with the debt limit by creating a Supercommittee, charged with saving $1.2 trillion – or else that amount would be cut mostly from annually appropriated spending.  Almost everyone agreed that if put into effect, this automatic “sequester” would be excessive; and so it was assumed that it would motivate the Supercommittee to cut a deal.  However, this trigger did not have its intended motivational effect, and so it was pulled.

Today, as we approach yet another pair of scheduled train wrecks – one more appropriations expiration and potential government shutdown on January 15, and the beginning of another debt-limit drama on February 7 – the sequester has somehow claimed a leading dramatic role.  This is truly hard to justify.  Not only is the sequester not sound budget or governmental policy, its amount is also arbitrary, and insufficient to solve the actual long-term budget problem.  Yet the new budget resolution conference committee – and the Congress as a whole – have chosen to sanctify the sequester as their reason for being.  They seek somehow to replace the arbitrary sequester savings for the next year to justify enacting appropriations and turning off the debt limit.

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A couple of weeks ago, I had the pleasure (based on the fellowship, not the subject matter) of speaking at the annual Economic Summit of the Dallas Regional Chamber about the budget problem.  There were so many written questions submitted for the discussion period at the end of the session that the moderator could feed in only a few.  Briefly this week, I would like to try to answer one question that did not come up during that discussion.  In a later entry or entries, I will try to do some more.

This first question is one that I have heard occasionally, but which has never been addressed actually to me.  It goes something like this:  What would be worse, a federal government default, or running up this enormous debt to pass on to future generations?

My answer, which I perceive from the question would come off as contrarian, would be “default.”  It probably will require some explanation.

(To clarify terminology at the outset:  The written question used the term “default,” as I suspect did I in the oral presentation.  There are strong differences of opinion about the precise meaning of that term.  Some believe that only the failure to pay principal or interest on a debt would qualify as “default;” others would say that it means simply failing to pay all of your bills in full and on time.  Trying to respect these differences in the following discussion, let me confess that I fall into the latter camp.)

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