Yesterday, Zeke Emanuel advanced an interesting proposal for Social Security and Medicare in a blog at The New York Times: varying the retirement ages for lifetime earnings. This policy is a response to a common criticism of raising the retirement ages that increases in life expectancy over time have been uneven across income groups. Emanuel's idea would work as follows:

People in the bottom half of the lifetime earnings distribution would become eligible for normal retirement benefits at age 65 for Medicare and 66 for Social Security, just as they are today. But people in the next quarter of the lifetime earnings distribution would become eligible for the respective programs at 67 and 68, and those in the top quarter would become eligible at 70 and 71. All eligibility ages would increase over time, as they are scheduled to now.

In all income brackets, those choosing to retire later than the standard age would still receive higher Social Security benefits, called delayed-retirement credits. For those choosing to retire earlier and accept reduced benefits, on the other hand, nothing would change in the lower bracket, while the minimum age would increase in the two higher income brackets. And wealthier older people would have the choice of buying into Medicare at age 65, though they would have to pay for it before the age of 70.

Emanuel also notes that the progressive retirement ages would reflect the difficulty each income group would have in continuing to work at older ages. People in the bottom half of the distribution are more likely to be in physically demanding jobs, while upper-income people would generally not face that difficulty and otherwise be able to support themselves.

We have written before that raising the retirement ages would be good for the budget and the economy by encouraging people to work longer and accumulate greater savings. This sort of modification is a productive and interesting idea to address concerns about the effects of the policy.

Via the Washington Post, it seems that the House majority is looking at creating a fast track procedure for passing tax reform in 2013. This will enable a tax reform bill to be passed by an up-or-down vote with no amendments once it is formulated. 

House Ways and Means Committee chairman Dave Camp (R-Mich.) said Thursday that he has two goals with respect to the tax code: "One, block massive, job-killing tax increases" at the end of the year, when the George W. Bush-era tax cuts are set to expire. "And two, enact — not just pass — comprehensive tax reform."

There is strong support to use the expiration of the [Bush tax cuts] as leverage to force action in 2013 on comprehensive tax reform,” Camp told the Federal Policy Group’s annual tax seminar. "How? Simple: In addition to extending current low-tax policies originally enacted in 2001 and 2003, we should enact fast-track procedures to compel comprehensive tax reform next year."

Camp said he is mulling what form those procedures might take. He and House Speaker John A. Boehner (R-Ohio), who endorsed the idea this week, made comparisons to the process by which lawmakers adopt trade agreements negotiated with other nations. Under that system, Congress has 90 days to reject or approve a pact in its entirety without amendment.

Although we do not support extending the tax cuts without offsetting the cost of enacting a comprehensive fiscal plan, the discussion of a two-stage process by House Republicans may indeed be helpful. An oft-cited critique of enacting tax reform to replace the fiscal cliff--or more generally in reaction to action-forcing events--is that reform is too complex to be done in such a short timeframe. The House Republicans offer a model for tax reform to instead come in pieces. In a deal at the end of the year, legislation could combine a temporary partial or full extension (fully paid for) with a fast-track process to enact tax reform by a certain time with agreed-upon parameters and especially a revenue target. To ensure that the revenue target is met and to facilitate a deal, the process could be backed up with a credible trigger that enacts across-the-board tax expenditure cuts or other revenue increases -- something proposed as part of the Simpson-Bowles plan.

We have discussed how the a two-stage process could work with regards to the Super Committee in a paper last November. We said:

If the Super Committee only agrees to a small plan or needs more time to work out the technical details of a larger plan, it is likely to require either extending the deadline for the Super Committee or using a two-stage process. A credible process must:

• Go Big: Achieve savings large enough to stabilize and reduce the debt as a share of the economy;
• Include a large and meaningful down payment;
• Include a detailed framework for the second stage;
• Put in place an expedited process to achieve additional savings within the next three to six months, with fast-track status; 
• Allow for the consideration of other plans if larger plan is not adopted; 
• Establish a credible enforcement mechanism to ensure the required savings are achieved.

We also showed how the process might play out. Move forward the dates by a year, and it would be a relatively accurate timeline of what could happen in a cliff-averting deal.

It is good to see that tax reform is getting some attention and priority on Capitol Hill, although we would like to see tax reform contributing significantly to deficit reduction. The House has shown that the complexity and work required for tax reform should not be an excuse not to include in a cliff-averting deal. A two-step process backed up by a trigger would be a very useful component in a fiscal plan.

Steep budget cuts are linked to recession and higher unemployment in Europe, argue several commentators (see here for example). Are they right? Certainly, some countries have struggled economically when reducing deficits before their economies have made a recovery. But Germany’s case bears examination as a successful example of combining fiscal sustainability with economic growth.

Since late 2010, Germany has pursued gradual deficit reduction in solid, reassuring plans for medium-term debt reduction. Germany entered the recession with a balanced budget and declining yet high unemployment of 7.6 percent. In late 2008 and 2009, the German government passed stimulus measures which, when combined with increased mandatory spending, lifted total spending from about 44 percent of GDP in 2008 to 48.1 percent in 2009 (including state and local spending). This brought the 2010 deficit to 4.3 percent, while holding unemployment steady for a year before seeing a modest drop to 7.1 percent in 2010. Then in 2010, the government announced a significant deficit-reduction package, which has combined with a wind-down of stimulus spending to result in spending at 45.6 percent of GDP in 2011 and projected at 44.7 percent in 2013, alongside slightly declining tax revenues as a share of GDP.

^{Sources: IMF, La Gazette De Berlin
***Numbers not available for these years}

As a result of Germany’s fiscal reforms, gross debt is predicted to decline from 82 percent of GDP in 2011 to 71 percent in 2017. While German GDP growth will be lower this year than last, so will German unemployment (it also helps that their unemployment is relatively low to begin with). Despite recent state election victories for the opposition Social Democrats, an early May opinion poll shows that Germans support ongoing budget discipline, by 55 percent to 33 percent.

A main reason for Italy’s current decline in deficits is an intentional defensive reaction against the recent sharp increase in interest rates on Italian debt, which exceeds 100 percent of GDP. This dynamic offers a second lesson next to Germany’s model of gradual deficit reduction. Namely, Italy’s pre-recession debt of nearly 90 percent of GDP left it with fewer options today, because Italy now pays a high interest rate premium in order to sell government bonds. And in order to hold interest rates from rising even higher, Italy has little room for counter-cyclical fiscal policy.

^{Source: IMF}

All governments are ultimately limited in their ability to borrow. The sooner they implement specific plans for debt stabilization, the better their options for the short and long term, including the flexibility to reduce deficits gradually. Germany has demonstrated this the past two years, and it offers the United States a useful model for getting our own fiscal house in order. We should pass a plan now while we have the ability to bring our deficits down gradually rather than immediately.

We have been warning for a few months now about the potential consequences of the fiscal cliff -- and adding to the debt by averting it all together. As it turns out, the short-term economic consequences may already be occurring, according to a recent Washington Post article.

Defense contractors have slowed hiring. Tax advisers are warning firms not to count on favorite breaks. And hospitals are scouring their books for ways to cut costs...

The uncertainty is already prompting some firms to take action. Many more say they will be forced to contemplate layoffs and other cost-cutting measures long before the end of the year unless the Republican House and the Democratic Senate come up with an alternative path to tame deficits. But with control of the White House and both chambers of Congress in play on Nov. 6, aides say it is impossible to begin mapping a strategy for compromise until they know who wins the election, by how much and on which issues.

That seems to be a good argument for getting moving now on a plan to deal with it. We have already estimated that the cliff would hurt the economy by about two percent of GDP in 2013 and 2014, but that does not say what will happen in 2012 in anticipation of everything happening.

The one commonality between the many comments from the business and policy community in the Post article is that the scariest aspect of the cliff is the lack of any plan that would pass Congress at this point. As Bob Greenstein of the Center on Budget and Policy Priorities commented:

On the one hand, you say: "We’re a functioning country. Somehow, we’re going to work this out." But then you ask: "What’s the scenario for a potential solution?" And you can’t come up with anything that you can see actually passing Congress.

That, of course, does not mean that there isn't the ability to come up with a plan, just that there has not been good-faith negotiations yet. Also, just because the cuts would adversely affect certain groups does not mean that we should permanently avert the cliff without deficit reduction. In order to get our debt under control, interest groups need to recognize that everyone will need to contribute to deficit reduction. But indications that businesses and people across the country are dealing with the cliff already should give an impetus for Congress to negotiate a smart and gradual deficit reduction plan very soon. 

On Sunday, Fiscal Commission co-chair and former White House Chief of Staff Erskine Bowles delivered a speech at American University's School of Public Affairs Commencement. Apparently, the message hit home for Ben Ritz, Chair of Fiscal Policy and Policy Caucus Director of AU's College Democrats. Ritz wrote a blog post yesterday called "Answering Erskine Bowles' Call to Action." His post makes the case to the rest of the AU Democrats to support a comprehensive fiscal plan.

Ritz says that a main reason why one should care about the debt is interest. He explains:

When we accumulate more debt, we end up increasing both the percentage of it that investors want in interest and the total amount we end up having to pay that interest on. And each year that we run deficits, we end up needing to take on more debt to pay the increasing interest, turning it into a vicious cycle of exponentially increasing costs.

What are the ramifications of having to pay so much interest? Primarily, it’s wasted money. Every dollar spent on interest is a dollar we don’t spend on investments in schools, roads, national security, scientific research, healthcare, or the social safety net.

Considering that the debt is projected to rise rapidly if current policy is continued, we will end up finding our budget consumed by interest. But of course, we would likely have a fiscal crisis before our spending on interest would take up too much of the budget as creditors lose faith in our debt. In that case, we would have to enact immediate tax increases and spending cuts, causing severe damage to the economy.

With all that in mind, what's the solution?

Fortunately, there is hope! Erskine Bowles and former Senator Alan Simpson (R-WY) made a bold, bipartisan proposal to avert the disaster in 2010. Their plan was a balanced package that would reform the tax code, reign in entitlement spending, and halt the growth of the military industrial complex- all while preserving the social safety net and the fragile economic recovery. The plan got 11 out of 18 votes (6 Democrats and 5 Republicans) of the commission; a clear bipartisan majority, but three votes short of the threshold needed to force a vote in Congress on the package.

Finally, Ritz points out that the fiscal cliff will provide a political push for comprehensive reform on the scale of Simpson-Bowles. With a lot of provisions in the budget already "up for negotiation" at the end of the year, there is a very real opportunity for a fiscal plan, and that has inspired him to take action to support serious solutions to our nation's debt conundrum and to urge his fellow College Democrats to do the same. He concludes, "I’m ready to answer Erskine Bowles’ call to action; are you?"

This blog post is another example of citizens wanting to make a difference in our budget discourse. Learn more about what you can to get involved here and sign our petition to have the presidential candidates debate the debt here.

The video of Erskine Bowles' speech is below.