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Congressional Memo: S.&P. Downgrade Is Seen as Adding Urgency to Debt-Cutting Panel

August 8, 2011 by Leave a Comment

Even before the panel is appointed, its mission is expanding. Its role is not just to cut the annual budget deficit and slow the explosive growth of federal debt but also to appease the markets and help restore the United States’ top credit rating of AAA. Otherwise, taxpayers may eventually have to pay more in interest for every dollar borrowed by the Treasury.

The report certainly got the attention of Capitol Hill. “I think this is one of the most telling, important moments in our country’s history right now,” Senator John Kerry, Democrat of Massachusetts, said Sunday on the NBC program “Meet the Press.” He added: “This poses a set of choices not just about a recession. It’s about a financial crisis and the structure of our economy, which really has been misallocating capital.”

In the S.P. report on Friday outlining the reasons for removing long-term Treasury debt from its list of nearly risk-free investments, the company cited doubts about the ability of the two political parties to bridge their gulf on fiscal policy.

Credit rating agencies have thus emerged as a powerful constituency whose concerns are taken seriously by Congress.

Representative Joe Courtney, Democrat of Connecticut, said he had “read and reread the S. P. report” several times since it was issued Friday night, and he said it could spur action by Congress. If the 12 members of the committee, to be appointed by Aug. 16 by Congressional leaders of the two parties, could agree on a deficit-reduction package, and if Congress approved it, Mr. Courtney said, “that would surprise a lot of skeptics” and could disprove the company’s criticism of the United States political system.

Representative Blake Farenthold, a freshman Republican from Texas, said the S.P. report could have a beneficial effect. “Anything that encourages the new committee to get the job done and get us back on a rational fiscal path is a good thing,” Mr. Farenthold said.

Another freshman Republican, Representative Steve Southerland II of Florida, said the credit report created “a sense of urgency for the two parties to come together.” The possibility of a further downgrade “scares me,” Mr. Southerland said.

The stated goal of the new panel, the Joint Select Committee on Deficit Reduction, is to cut federal budget deficits by a total of “at least $1.5 trillion” over the next decade.

The first round of savings under the new law, coming from annual caps on appropriations, is estimated at $917 billion over 10 years. Standard Poor’s had said it was hoping to see $4 trillion in total deficit reduction. If the joint committee wanted to reach that goal, it might seek a bigger, more comprehensive deal, aiming to save $3 trillion rather than $1.5 trillion over 10 years.

If Congress wants to satisfy the rating agencies — Moody’s and Fitch have so far kept their AAA ratings of government debt — it will need to lock in substantial deficit-reduction measures, without using the kind of budgetary gimmicks that sometimes appear to produce savings under accounting rules prescribed by Congress, several lawmakers said.

Senator John McCain, Republican of Arizona, said Sunday on “Meet the Press” that the credit downgrade created an “added incentive” for the new committee and Congress as a whole to agree on major deficit-reduction plans.

On the other hand, opposition to proposals from the committee, due by Nov. 23, could increase with the size of the package. And a bigger joint committee bill might make the alternative — automatic across-the-board cuts saving $1.2 trillion over 10 years — appear more attractive, lawmakers said.

Democrats like the Senate majority leader, Harry Reid of Nevada, cited the downgrade as another reason to include revenue-raising measures in a package. Republicans like Speaker John A. Boehner of Ohio said the downgrade strengthened the case for deeper cuts in spending.

Before their talks broke down last month, President Obama and Mr. Boehner were pursuing a “grand bargain” that sought savings of $4 trillion over a decade.

Senator Kerry also endorsed that goal. The United States must show the markets that it is “deadly serious about dealing with its long-term structural debt,” he said, and the way to do that is by “putting a plan on the table, $4 trillion plus, if necessary.”

Republicans have historically seen the deficit as an issue that plays to their political advantage. Deficit-reduction proposals floated by Mr. Obama as part of a grand bargain set him against many of his liberal supporters.

Congressional Democrats, lobbyists for older Americans and advocates for the poor expressed alarm last month when Mr. Obama showed serious interest in proposals to reduce the cost-of-living adjustment for Social Security benefits, increase the eligibility age for Medicare and cut Medicaid payments to the states for treating poor people.

The new panel will have 14 weeks to do its work. Republicans have made clear that they will push for cuts in federal spending under the new health care law, arguing that it should be on the table along with other government programs and tax breaks. The Congressional Budget Office says the law will cover 34 million uninsured people by expanding Medicaid and subsidizing private insurance at a cost of $1.1 trillion over 10 years.

On “Fox News Sunday,” Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, said the new panel would probably not “achieve a full fix to our problems because Democrats have never wanted to put their health care bill on the table.”

S.P. did not advocate a specific mix of increased revenue and spending cuts. But it did say that overhauling entitlement programs was “key to long-term fiscal sustainability” and that the debt deal “envisions only minor policy changes on Medicare.”

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Filed Under: Economy News Tagged With: , ,

As Vote Looms, Leaders Court Skeptics

August 1, 2011 by Leave a Comment

With only hours left before Tuesday’s looming deadline that carries the threat of a federal default, Vice President Joseph R. Biden Jr. arrived at the Capitol on Monday morning for back-to-back, closed-door meetings with Democratic lawmakers in the House and Senate. Republicans in the House and Senate also huddled in advance of the votes.

The last-minute wrangling on Monday morning reflected the lack of enthusiasm for the debt deal as lawmakers, party activists and pundits expressed relief but little excitement for a compromise that appears to have left few partisans eagerly promoting the deal as the one they wanted.

On the Senate floor on Monday, Senator Harry Reid of Nevada, the majority leader, said: “People on the right are upset. People on the left are upset. People in the middle are upset.”

But he called it a “remarkable agreement which will protect the long-term health of our economy.”

In his first public comments since the deal was reached Sunday night, Mr. Boehner on Monday hailed the agreement for providing a path toward a balanced budget amendment to the Constitution.

“It gives us the best shot that we’ve had in the 20 years that I’ve been here to build support for a balanced budget amendment,” he said.

Representative Eric Cantor of Virginia, the majority leader, said the deal is “not perfect,” but said its passage will begin the process of changing the political culture in Washington.

“The big win here for us, and for the American people, is the fact that there are no tax hikes in this package,” Mr. Cantor said. “The last thing we need is tax hikes.”

The House moved Monday toward an afternoon vote, but it remained unclear whether the Senate would follow suit by the end of the day. Mr. Reid told his colleagues Monday afternoon that a final vote on the measure could be brought up Monday night or Tuesday.

A sense of exuberance over the weekend compromise gave way to a daylong expression of grievances.

Mr. Biden spent hours on Capitol Hill, listening and gently persuading Democrats to vote for the plan. His meeting with House members lingered far beyond its allotted time, as several representatives voiced their strong objections to what they perceived as a deal cut on the back of poor and working-class Americans, with no sacrifice by the rich in the form of tax increases.

“I wouldn’t call it anger, but we are perplexed that it has turned out like it has,” said Representative G.K. Butterfield, Democrat of North Carolina, grimacing as he left the meeting. “But we’ve run out of options and we know the consequences. I’ve heard horror stories from the Great Depression. I don’t want my fingerprints on that.”

Representative Nancy Pelosi of California, the minority leader, reminded her fellow Democrats of the consequences if the deal would collapse. She did not twist arms or deliver stern remarks, several legislators said, but rather urged them to vote their conscience.

Representative Elijah Cummings, Democrat of Maryland, said he had deep reservations about the budget compromise, declaring: “This is a hard compromise. But he added that the “ramifications would be long” if the deal did not go through.

Several Democrats said they were reserving judgment until the voting actually began, when it became clear how many votes that Democratic leaders needed to deliver. Republican leaders were embroiled in their own challenge of trying to persuade conservatives to sign onto the plan, reminding them that the deal did not include raising taxes.

Most of the leading 2012 Republican presidential candidates weighed in Monday in opposition to the debt ceiling deal, saying that it did too little to address the nation’s spending problem. Mitt Romney, the former governor of Massachusetts, said the deal “opens the door to higher taxes and puts defense cuts on the table.”

But business groups urged passage as the United States stock market initially rallied before sinking again on disappointing manufacturing news. The U.S. Chamber of Commerce said in a statement that the agreement “takes us a step in the right direction and is the right thing to do.”

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Economic Scene: Even for Cashiers, College Pays Off

June 26, 2011 by Leave a Comment

It’s clear who made the right decision. The educated American masses helped create the American century, as the economists Claudia Goldin and Lawrence Katz have written. The new ranks of high school graduates made factories more efficient and new industries possible.

Today, we are having an updated version of the same debate. Television, newspapers and blogs are filled with the case against college for the masses: It saddles students with debt; it does not guarantee a good job; it isn’t necessary for many jobs. Not everybody, the skeptics say, should go to college.

The argument has the lure of counterintuition and does have grains of truth. Too many teenagers aren’t ready to do college-level work. Ultimately, though, the case against mass education is no better than it was a century ago.

The evidence is overwhelming that college is a better investment for most graduates than in the past. A new study even shows that a bachelor’s degree pays off for jobs that don’t require one: secretaries, plumbers and cashiers. And, beyond money, education seems to make people happier and healthier.

“Sending more young Americans to college is not a panacea,” says David Autor, an M.I.T. economist who studies the labor market. “Not sending them to college would be a disaster.”

The most unfortunate part of the case against college is that it encourages children, parents and schools to aim low. For those families on the fence — often deciding whether a student will be the first to attend — the skepticism becomes one more reason to stop at high school. Only about 33 percent of young adults get a four-year degree today, while another 10 percent receive a two-year degree.

So it’s important to dissect the anti-college argument, piece by piece. It obviously starts with money. Tuition numbers can be eye-popping, and student debt has increased significantly. But there are two main reasons college costs aren’t usually a problem for those who graduate.

First, many colleges are not very expensive, once financial aid is taken into account. Average net tuition and fees at public four-year colleges this past year were only about $2,000 (though Congress may soon cut federal financial aid).

Second, the returns from a degree have soared. Three decades ago, full-time workers with a bachelor’s degree made 40 percent more than those with only a high-school diploma. Last year, the gap reached 83 percent. College graduates, though hardly immune from the downturn, are also far less likely to be unemployed than non-graduates.

Skeptics like to point out that the income gap isn’t rising as fast as it once was, especially for college graduates who don’t get an advanced degree. But the gap remains enormous — and bigger than ever. Skipping college because the pace of gains has slowed is akin to skipping your heart medications because the pace of medical improvement isn’t what it used to be.

The Hamilton Project, a research group in Washington, has just finished a comparison of college with other investments. It found that college tuition in recent decades has delivered an inflation-adjusted annual return of more than 15 percent. For stocks, the historical return is 7 percent. For real estate, it’s less than 1 percent.

Another study being released this weekend — by Anthony Carnevale and Stephen J. Rose of Georgetown — breaks down the college premium by occupations and shows that college has big benefits even in many fields where a degree is not crucial.

Construction workers, police officers, plumbers, retail salespeople and secretaries, among others, make significantly more with a degree than without one. Why? Education helps people do higher-skilled work, get jobs with better-paying companies or open their own businesses.

This follows the pattern of the early 20th century, when blue- and white-collar workers alike benefited from having a high-school diploma.

When confronted with such data, skeptics sometimes reply that colleges are mostly a way station for smart people. But that’s not right either. Various natural experiments — like teenagers’ proximity to a campus, which affects whether they enroll — have shown that people do acquire skills in college.

Even a much-quoted recent study casting doubt on college education, by an N.Y.U. sociologist and two other researchers, was not so simple. It found that only 55 percent of freshmen and sophomores made statistically significant progress on an academic test. But the margin of error was large enough that many more may have made progress. Either way, the general skills that colleges teach, like discipline and persistence, may be more important than academics anyway.

None of this means colleges are perfect. Many have abysmal graduation rates. Yet the answer is to improve colleges, not abandon them. Given how much the economy changes, why would a high-school diploma forever satisfy most citizens’ educational needs?

Or think about it this way: People tend to be clear-eyed about this debate in their own lives. For instance, when researchers asked low-income teenagers how much more college graduates made than non-graduates, the teenagers made excellent estimates. And in a national survey, 94 percent of parents said they expected their child to go to college.

Then there are the skeptics themselves, the professors, journalists and others who say college is overrated. They, of course, have degrees and often spend tens of thousands of dollars sending their children to expensive colleges.

I don’t doubt that the skeptics are well meaning. But, in the end, their case against college is an elitist one — for me and not for thee. And that’s rarely good advice.

David Leonhardt is a columnist for the business section of The New York Times.

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