The Daily Dish

Good Morning –

The president will meet with congressional leaders at the White House today to begin negotiations on the fiscal cliff. WaPo reports [4] that “the White House says Obama’s starting point for negotiations is his February budget plan,” which claims $4 trillion in deficit reduction that DHE explains [5] is more like $600 billion over ten years.

The WSJ notes [6] that while the president and these same leaders have had similar debates several times over the past two years “the cost of inaction this time is pretty clear: The U.S. faces automatic year-end tax increases and spending cuts that experts predict would drive the country back into recession if Congress and the White House don’t agree on an alternative plan.” That’s not to mention the threat of another downgrade, the impact on public schools [7] and on the states [8].

As these negotiations evolve, it’s important that everyone remain on the same page about the issues that need addressing in the lame duck and those that will be 2013’s problem. That’s why we have released a new e-book [9] detailing what exactly comprises the fiscal cliff and how inaction will impact the economy.

Doug’s Daily Economic Outlook

The top priority for 2013 should be Social Security reform.  A serious reform effort would (1) send the right signal to international capital markets, (2) represent the end to mindless intransigence on entitlement reform, (3) do the right thing for future retirees, and (4) is actually pretty easy.  Let's take these in reverse order.  It is easy.  Social Security is a money transfer program driven by demographics.  It is easy to predict (aging, after all, does happen one year at a time) and simple to fix. 

The current "plan" for Social Security is to keep it solvent by slashing benefits -- for those in retirement -- by over 25 percent when the trust fund runs out.  Really?  That is a ridiculous plan. The program should be put on a sound financial footing so that those planning their retirement have a solvent program to plan around.

Despite its importance and ease, reform of Social Security was taken off the table by the president during the super committee talks, has been ruled off limits by Senate Majority Leader Reid and castigated by House Minority Leader Pelosi.  The unwillingness to fix a transparently broken program, especially one where the solutions are not difficult, is symptomatic of the larger problem of not coming to grips with the larger entitlement spending problem.  (For today's installment of denial see Paul Krugman [10]). In an era where budget problems are the key economic threat, entitlement spending is the budget problem.

Finally, nothing would be a better signal to financial markets than to take on the traditional 3rd rail of American politics and fix a program that has zero -- that's right, zero -- near-term negative macro impacts.  No "austerity".  Instead, simply a better, albeit not dramatically better, budget outlook, a more honest promise to retirees, and evidence that the political system is not broken.  

What We’re Reading

Deadline Delayed For a Month on Health Exchanges – The federal government extended the deadline Thursday for states to decide whether to implement a key piece of President Barack Obama’s health overhaul after Republican state officials struggled to reach decisions. House ahead of a Friday deadline, the administration told states that they could take another month to declare if they will set up their own exchanges, where people can shop for approved plans and apply for tax subsidies toward the cost of health-insurance premiums. (WSJ [11])

Senate ‘Gang of 8’ Says This Isn’t Moment in Deficit Talks – After years of wrangling, members of the bipartisan group of senators known as the Gang of Eight are ratcheting back expectations for a deficit reduction breakthrough and now say the best they can probably do is offer ideas for the one fiscal negotiation that will truly matter: talks between President Obama and Speaker John A. Boehner that begin in earnest on Friday. (NYT [12])

Housing not yet out of the woods: Bernanke – The improving housing market is “far from being out of the woods,” Federal Reserve Chairman Ben Bernanke said on Thursday, arguing that overly tight lending standards are part of the problem. The Fed, which has focused on mortgage bonds in its latest round of asset purchases, will continue to do what it can to support the housing market, Bernanke said in a speech that avoided policy specifics. (Reuters [13])

Report: FHA to Exhaust Capital Reserves – The Federal Housing Administration’s projected losses hit $16.3 billion at the end of September, according to an independent annual audit to be released Friday, a much larger figure than had been forecast earlier. The report suggests the FHA will require taxpayer funding for the first time in its 78 years, though that won't be decided until early next year. Housing officials said late Thursday they would announce a series of steps on Friday to raise revenue and avert such a milestone. Those steps are likely to raise the cost of FHA-backed mortgages for future borrowers. (WSJ [14])

Top Senate lawmakers see chance to revamp US energy policy – The United States needs to update its energy policy to reflect the boom in natural gas and oil production that has boosted manufacturing jobs, said the top Democrat on the Senate energy committee on Thursday…Congress has not has a comprehensive energy bill since 2007, well before the widespread use of hydraulic fracturing or “frakcing” technology to blast free natural gas and oil trapped in shale rock. (Reuters [15])

Euro-Zone Economy Shrinks Again – The euro-zone economy contracted in the third quarter, offering little hope for the worsening global environment as rising unemployment and fiscal austerity across much of Europe undermine the region's fortunes. The euro zone hasn't grown for four straight quarters and the latest decline in gross domestic product was the second straight. Economists often define recession as two straight quarterly GDP contractions. (WSJ [16])

Also from the Forum

Iran Sanctions: Overview -- U.S. sanctions against Iran have accused and evolved over time. During the 1980s and 1990s, U.S. sanctions were intended to address Iran's support for terrorism. Today's sanctions seek to persuade Iran to abandon its nuclear program, and to a lesser degree support human rights and political change. (Overview here [17]) 

Boom, Bust, and Beyond: A Look at Housing Market Data in Florida -- The housing crisis resulted in a nearly unprecedented loss of household wealth that, while widespread, hit a handful of states particularly hard. Congress now turns to address a grim fiscal outlook and a housing finance system burdened with uncertainty. In Florida, prices statewide fell 52.7 percent from the peak of the market in April 2006 to the trough in October 2011, according to Zillow. As a large, diverse state with over 19 million people, the pace of the recovery has varied among its metropolitan areas. Yet Florida's narrative is defined by high foreclosure rates, lengthy foreclosure timelines, and steep jobs losses in the construction industry. For sustained improvement across the state, Florida must quickly clear the inventory of distressed properties, i.e. foreclosed homes, and pursue stronger job and wage growth. (Paper here [18])