The Daily Dish

Good Morning –

The White House has a new offer for the fiscal cliff but a closer look at the details shows not everything quite adds up to the claimed $1.2 trillion in revenues and $1.2 trillion in spending reductions. AP reports that, “Boehner aides say the revenue is closer to $1.3 trillion if revenue triggered by the new inflation index is counted, and they say the spending reductions are closer to $930 billion if one discounts about $290 billion in lower estimated debt interest.”

On taxes, Reuters reports “the White House proposed leaving lower tax rates in place for everyone except those earning $400,000 and above, the source said on condition of anonymity... Obama also moved closer to Boehner on the proportion of a ten-year deficit reduction package that should come from increased revenue, as opposed to cuts in government spending. Obama is now willing to accept a revenue figure of $1.2 trillion, down from his previous $1.4 trillion proposal…Some of the savings in spending proposed by Obama would come from reducing the size of cost-of-living increases for all but the most "vulnerable" recipients of the Social Security retirement program, the source said, through the use of a different formula to calculate the regular raises called ‘chained Consumer Price Index.’” 

Beyond the nearly $600 billion worth of policy being debated now, there is the larger debt crisis. As David Wessel notes in today’s WSJ, “the size and trajectory of the federal budget can be boiled down to three basics: the economy, spending and taxes. These fundamental fiscal forces are likely to persist and drive future budget fights, even if Washington cuts a deal, as looks increasingly possible, to avoid the tax increases and spending cuts associated with the year-end "fiscal cliff." So, “a fiscal-cliff deal will, at best, only slow the pace of federal borrowing not eliminate it, the government's interest tab will continue to rise even if there is an agreement soon.” 

These negotiations are simply a means to an end to resolving our larger economic challenges – and that begins with tax and entitlement reform next year. After all,  WSJ points out, “the biggest long-term driver of the federal budget and its eye-popping deficit is health care.”

Fiscal Cliff Fact of the Day – President Obama’s latest offer calls for a two year extension of the debt limit, but 32 years of history shows us that, on average, increases in the debt limit have been necessary every 236 days. Two years is well above the average of the past 32 years. (History here)

Doug’s Daily Economic Outlook

Entitlement reforms are central to negotiations over the fiscal cliff, and no entitlement is in need of greater reform than Medicare.  From a fiscal perspective, Medicare is the problem.  At present, the program runs a cash flow deficit -- the gap between premiums and payroll taxes flowing in and payments flowing out -- of $300 billion annually.  Because of the massive red ink, Medicare alone is responsible for over 25 percent of the federal debt outstanding since 2001. (See here.) 

And there is no relief in sight.  Over the next decade, Medicare will grow at an average rate of 7 percent, in part because there will be 10,000 new beneficiaries every day as the baby boom retires.  There is simply no way that tax revenues or the economy will grow at that high a sustained rate. The result is that the program will spend $7.1 trillion over the next 10 years and become an increasing burden on the federal budget and the economy.  

In short, Medicare is the federal budget problem, and the federal budget problem is our largest economic and national security threat.  All this would be bad enough if Medicare provided quality health care.  But it is widely recognized that its fee-for-service nature provides incentives for overuse of medical services and does not reward quality.

The bottom line is that Medicare reform must be a national priority and deserves a central role in resolving the dispute over the fiscal cliff.

What We’re Reading

U.S. Senate takes up $60 billion Sandy bill amid charges of waste – The U.S. Senate on Monday began debating a $60.4 billion aid bill to rebuild communities devastated by Superstorm Sandy amid criticism by conservative groups who said the measure was loaded with wasteful, non-disaster spending. The Democratic-controlled Senate is looking to pass the disaster aid bill this week. But Republicans, wary of its huge price tag in the midst of tense debt and deficit negotiations in Washington, are likely to try to ratchet back some of its provisions through amendments. (Reuters)

Beneath Budget Battle, a Health-Spending Juggernaut – Is all this talk of the “fiscal cliff” making you sick? Actually, it’s the other way around: The biggest long-term driver of the federal budget and its eye-popping deficit is health care. The government dollars go out the door through a variety of programs: benefits for federal workers, the military and veterans; Medicaid coverage for the poor and disabled; and the biggest slice of all, Medicare, the health-care program serving the elderly. All together, nearly one in four federal dollars is devoured by health-care spending. That is more than double the 10% of the budget it consumed in 1960, before Medicare and Medicaid were created. The Congressional Budget Office projects that in just a decade, health care will consume nearly one in three federal dollars, pressuring government spending in other areas, such as infrastructure and the military. (WSJ)

U.S. unemployment rate could stall despite job growth – The U.S. unemployment rate could level off or even turn higher depending on how fast discouraged job seekers return to the job hunt, according to research published Monday. That could deal a blow to consumer confidence and spending, the research by top San Francisco Federal Reserve Bank economists suggested. (Reuters)

Wall Street Sees Promise in Multifamily Loans – Fannie Mae and Freddie Mac are finally getting some private-sector competition in the business of financing loans in the debt market, at least in multifamily housing. Wall Street lenders are getting more aggressive bidding on multifamily loans to securitize in recent months, helped as the demand for their commercial mortgage-backed securities has cut their costs to the lowest in more than four years, getting closer to those of government-advantaged programs of Freddie Mac, Fannie Mae and the Federal Housing Administration. (WSJ)

States move forward on health insurance exchanges – Eighteen states and the District of Columbia have moved forward with plans to set up their own statewide health-insurance-buying exchanges ahead of a key deadline. States had until Friday to submit applications to the federal government to establish state-based exchanges. Health and Human Services Secretary Kathleen Sebelius on Monday announced the list of states that met the deadline, which comprised California, Hawaii, Idaho, Minnesota, Mississippi, Nevada, New Mexico, Rhode Island, Vermont, Utah, Kentucky, New York, Colorado, Connecticut, Massachusetts, Maryland, Oregon and Washington. States also can choose to set up an exchange under a state-federal partnership, with a decision on that option due Feb. 15. If any state is undecided after that, the federal government will run that state's exchange. (Washington Times)

Also From the Forum

The Week in Regulation: December 10-14 – Regulatory costs increased significantly this week, with an additional $366 million in burdens.  The main cost drivers were a National Highway Safety Administration (NHTSA) proposed rule for “event data recorders” and a FAA amended rule for crew rest requirements. (Breakdown here)