Where Do We Go From Here?

No one is satisfied with the “fiscal cliff” legislation that was born at the turn of the year.  Specifically, the federal government’s financial obligations are not satisfied, and a new budgetary booby trap has been set; there is no question that the ballooning public debt must be addressed again in short order.

So what happens next?  How do we get out of this bleak place?

Washington policy watchers are caught in an intellectual vice – or actually, three of them simultaneously.  To sketch out a “grand bargain” on the basis of the behavior of the last decade and a half is totally unrealistic.  But without an unrealistic, fundamental change of Washington behavior, this potentially malignant problem does not get solved.


Similarly, the new fiscal-cliff deadline requires action within two months.  But just as budget watchers said a year ago while forecasting deadlock until election day, and then a crunch until New Year’s Day, two months is not enough time to solve our enormous budget problem.

And finally, some Washington watchers say with resignation that it will take a financial-market crisis to motivate action.  But we already have had sufficient crises to fill any God-fearing person with motivation.  And more troubling, given the global economic environment, the next financial crisis could be less like a mild, warning heart attack, and more like a catastrophic one – bearing human costs that kill not only motivation, but also the patient.

We are mired in contradictions.  A small, politically feasible two-month deal will not solve the problem, and lowering the bar to such a least common denominator runs the risk that the mini-deal could falsely satisfy motivation for the necessary real deal.  But on the other hand, there is no oxygen left for those who choose to float in the rarified air of an unattainable grand bargain.  And a weak economy today will not tolerate the long-term medicine we need.

Agreement between our two polarized political parties will require an extraordinary degree of trust.  But there is no trust in Washington today.

So we need compromise between fire and ice, between black and white, between yes and no.

The two political parties will view the next step from very different vantage points.  Republicans will look at this recent deal and say that it included $600 billion of tax increases, accompanied by essentially zero spending cuts.  Democrats will counter that this view ignores relevant history, in that the deal passed with the increase in the debt limit in August of 2011 included $1.2 trillion of spending cuts – the reduction of the discretionary spending caps, which was in addition to the spending sequester that just was postponed for two months – with no revenue increases.  Democrats will note that these spending caps reduced future annual appropriations virtually to the levels recommended by both the Bowles-Simpson and the Domenici-Rivlin bipartisan plans, and that there is no guarantee that future Congresses of whichever party will be able to write and pass appropriations bills even at those historically low levels, much less at still lower ones.  One could roll this who-hit-whom-first surveillance video back for decades, but responsibly, one instead must make judgments about appropriate levels of spending and revenues today.

In sum, the next step(s) will be really tough.  If this were easy, it would have been done long ago.

So what is the next step, in this atmosphere of mutual distrust and recrimination?

As noted above, the real budget problem will not be solved between now and the beginning of March – a typically fallow period including time (arguably well) spent on the inauguration and the state of the union message.  So the March deal must include both near-term action to motivate avoiding a catastrophic debt-limit breach, and a credible vision of how we at least begin to address the full long-term debt chasm.  The answer for now is not that we lack a complete long-term plan.  That one is easy.  Just do Domenici-Rivlin (my preference) or Bowles-Simpson.  But those plans have been available for more than two years.  We lack the motivation, not the method.  In short, we need the shock to get Washington off the figurative dime – which shock ideally will not be the “financial crisis” that could turn out to be the moral equivalent of fatal this time.

Here is a modest idea (which is, as with all of our blog posts, strictly a personal view and not to be attributed to any organization).

The first-of-March bipartisan agreement, beyond whatever budget savings are needed politically to float the boat, should include the agenda for the remainder of the year.  Specifically, the Congress and the President agree to give the budget issue a rest until the end of 2013.

Instead, they will Save Social Security First.  (OK, I stole that one.  But only the rhetoric.)  They will make their priority for those ten months to establish sound long-term financing for what is arguably the most important federal program.  After that task is completed, they will resume their concern about the federal budget as a whole.


Quick overview:  Fixing Social Security in 2013, and doing that alone, checks every box of sound fiscal policy.  If only we could agree to do it…

Here is the point-by-point.

Sure, Social Security is widely thought to be the “third rail” of politics, and so many would say that bringing up Social Security now would be a “non-starter.”  But truth be told, the third rail now is Medicare.  Several Democratic leaders acknowledged during the chained-CPI interlude of the fiscal cliff debate that Social Security must be fixed; they merely added to that acknowledgment that Social Security should be addressed for its own sake, not as a part of a budget debate.  Well, this approach takes them up on that acknowledgment.  If Social Security must be considered, but not as a part of the budget debate, then Social Security must be addressed either (a) after the budget or (b) before the budget.  Let’s choose (b).

And yes, Democrats in particular resist addressing the Social Security financing problem, because they believe that by law Social Security “does not add a dime to the deficit” because it is separately financed, has its own trust fund, and therefore could operate without change until 2033 (when the Social Security Actuary projects that the combined OASDI trust fund will be drained bone dry).  Whether you believe that argument or not, in the interests of bipartisan comity, let’s take it at face value:  You could wait until 2033 to address Social Security’s financing.  Separate question:  Would you want to?  Is it the role of a “trustee” to stand by until the trust fund is gone, and then react?  Would you choose to put all of the burden of refinancing the system on post-2033 retirees and workers?  With no notice?  And with the necessary steps far more painful than if action had been planned and undertaken earlier?  I would bet that even most persons who hold the “trust fund” perspective of Social Security would vote “no” on all of those questions.

On the other side of the aisle, many House Republicans advocate replacing all or part of the current defined-benefit system with private accounts, which are anathema to Democrats and scare them off from even discussing a compromise.  But this deterrent may be weakened.  The market events of the last five years have made privatization appear much less attractive to the public.  Furthermore, the up-front budgetary costs of capitalizing private accounts, which seemed trivial in the era of budget surpluses, are now unaffordable.  (If younger “privatized” workers shift what were their payroll taxes into their own private accounts, then the federal government’s general fund, by borrowing or other means, must replace those funds – because Social Security already is running cash-flow negative, and needs that money to pay the benefits of today’s retirees.  In the late 1990s, everyone assumed that the budget surplus would fill that gap, but no more.)  So even though some Members of Congress will push in that direction, they will be most unlikely to achieve success.  And Democrats will be further reassured that the Senate would reject such approaches, and the President would veto them.

Absent privatization strategies, almost everyone agrees that refinancing Social Security will require both added revenues and reduced benefits.  Therefore, both sides can anticipate that the result necessarily will be a balanced compromise between their general positions.  So taking up the issue might not be quite so daunting as it would appear at first blush.

What would be the advantages?  Addressing an important (although admittedly not the most important – which is health care) component of the long-term budget problem would be salubrious to the financial markets and to economic sentiment in the United States.  Even if many of the participants in the debate maintained throughout that Social Security has a trust fund and is off-budget, decision makers in the markets could draw their own conclusions about the long-term fiscal implications.  And progress on Social Security also would send a positive message – the first in years – about the ability of Washington to address our important problems, and it would be a “confidence builder” for further steps in the future.

And then there is the here-and-now state of the economy. Many economists (personally, I believe they are right) say that the recovery is so weak that additional stimulus is justified.  Additional stimulus isn’t going to happen.  However, the next best thing is that virtually all Social Security savings will arrive in the outyears – and appropriately so, because future savings can suffice to justify and reinforce the almost universally acknowledged and accepted earned-benefit, pay-as-you-go public perception of the program.  Therefore, refinancing Social Security will not threaten the near-term recovery – it is not stimulus, true, but it also is not “anti-stimulus” – unlike most budget-motivated initiatives that would take purchasing power out of the economy immediately.  And truth be told, the nation’s finances do not need substantial immediate savings; signs of real progress for future years would elicit hosannahs from the choir.  The Congress and the President could come back later to achieve then-immediate savings after the economy achieves stronger footing.

If presented in a thoughtful way, this Save-Social-Security-First tactic really is not that radical.  In truth, just about everyone believes that Social Security’s financing must be fixed, and the sooner (though in a gradual way) the better.  It is just that almost everyone perceives him- or herself as too politically sophisticated to talk about it.  But unless we expect to allow Social Security as we know it to crash and burn, then at some future moment the crowd must be wrong.  Why not now?

The reflex answer to that question probably is that just about every Member of Congress, understanding as he or she surely does that Social Security must be addressed, would much prefer that either (a) the other party do it (but in his or her own party’s preferred way); (b) his or her successor in office do it; or (c) he or she, him- or herself, does the job, but in what he or she already had chosen as his or her last term in office.  Washington is the procrastination capital of the world – probably because Washington has so many painful tasks that must be done.  Put it off.  Do it later.

There may be a saving grace, however, in that today, painful choices are inevitable.  Action is painful; but not to decide is to decide, and inaction is painful – it entails the first default in our nation’s history, across-the-board spending cuts, and a widespread government shutdown.  As an elected policymaker today, you will be pilloried by your constituents for making hard choices, or you will be pilloried by your constituents for procrastinating the nation into an economic and financial hell.  Will this lead to taking on tough issues, and making painful but ultimately beneficial choices?  On the basis of past performance, no.  But the step suggested here may be the least unlikely way to improve on past performance.

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