James Pethokoukis

Politics and policy from inside Washington

Peter Orszag, the bizarro David Stockman

Jun 22, 2010 16:13 UTC

Peter Orszag never really seemed to want the job as President Barack Obama’s budget chief. His successor should be just as reluctant, having to deal with the fiscal aftermath of the stimulus and healthcare plans.

But there is little doubt Orszag will depart as the most consequential Office of Management and Budget director since the notorious David Stockman nearly torpedoed Reaganomics in the early 1980s by calling supply-side economics a sham. In hindsight, of course, Reaganomics looks pretty good, including 17 million net new jobs and a collapse in inflation.

But Orszag was no whistle-blower of some perceived fiscal sleight-of-hand. Instead, it was just the opposite. He was a facilitator and enabler, providing the intellectual firepower and energy behind Obama’s drive for healthcare reform. Orszag made the case to the president that reducing healthcare costs was an important element to slashing the long-term budget deficit. More importantly, he persuaded Obama the U.S. healthcare system was so inefficient, overall spending could be restrained while also providing near-universal health insurance coverage. In effect, “bending the curve” was a free lunch. Or at least close enough for government work.

It was an audacious claim, mostly based on a single controversial academic study. Republicans never bought into the theory, and neither did Orszag’s successor at the Congressional Budget Office, Uncle Sam’s fiscal scorekeeper. In the end, Obama was forced to cut future Medicare spending and raise taxes to make the numbers balance out — at least on paper. Few Washington observers think those cuts will happen, meaning that the budget deficit could explode if Orszag’s novel theories don’t pan out. And even if the cuts occur, many budget hawks were counting on them to make Medicare sustainable over the long-term, not create a new entitlement.

Too bad Orszag didn’t use his considerable political skills – Larry Summers was supposedly warned to be careful of the guy “wearing the cowboy boots and bad toupee” – to make the case for entitlement reform first. In that regard, Orszag’s legacy is uncertain at best.

The next head of OMB will need 24-carat credibility and authority. The president’s confidence won’t be enough. A potentially more Republican Congress will be needed to pass any fiscal austerity reforms recommended by Obama’s deficit panel. And voters will need to understand those painful fixes, while U.S. bond and currency investors will need to believe they’ll really happen.

One option would be a disciple of Bill Clinton, the last president to balance the budget. A bolder choice would be David Walker, the government’s former chief auditor. He now runs a foundation created by Blackstone Group co-founder Peter Peterson devoted to fiscal sustainability issues. Walker is a fire-and-brimstone preacher on the deficit, albeit one with a penchant for folksy aphorisms. He could both crunch the numbers and communicate them. But given the magnitude of the challenge, getting him might take some convincing.

COMMENT

Republicans measure everything by the fail trickle down Reaganomics! Obama’s problem is that he is headed down primrose path adopting too much of the same crap that got us into this mess!

Obama should make the banks absorb this crisis! The RECONCILIATION PROCEDURE should be used to do it quickly since matters of the budget is why it exist!

THE BANKS BOUGHT INTO WALL STREET SCAMS AND THE BANKS, IF NO ONE ELSE, SHOULD HAVE STOPPED IT BECAUSE THE RISKS SHOULD HAVE BEEN THOROUGHLY INVESTIGATED AND CALCULATED, THE WAY BANKS NORMALLY OPERATE! That’s why I believe the banks, Wall Street, AIG, and Bush collaborated to push a lot of money into circulation, causing inflation while raising tax revenue to pay for the wars! Must have been intended for the least able pay for wars FROM JUMP! Changed bankruptcy laws to do it!

The banks made the bad loans that caused the burden and the banks should bear that burden! Obama could turn this mess around overnight by the proper means IN HIS POWER TO DO IN WEEKS, NOT MONTHS OR CERTAINLY, NOT YEARS!

OBAMA USED THE RECONCILIATION PROCEDURE TO QUICKLY PASS HEALTH CARE AND SHOULD DO THE SAME TO SHIFT THE BURDEN OF THE CRISIS FROM THE PEOPLE TO THE BANKS!

The banks are the most able to bear the burden, especially if the people get their debt lifted and HUGE SPENDING BEGINS WHICH IS THE RESULTS! Then the banks have no excuse for not making loans! Right now money is going into the wrong pockets which is credit card payments to the banks instead of spending in the economy to lift businesses to generate jobs! Banks are sitting on the money and giving CEO’s big bonuses!

My solution doesn’t even require you to get out of stupid costly wars, or pushing for education, and trade policies to make a quick recovery within weeks! Getting out of stupid costly wars, pushing for education, and trade policies are the things that would surely improve upon THE POWERFUL IMPACT OF MY SOLUTION!

JUST SHIFTING THE BURDEN OF PUBLIC DEBT TO THE BANKS POPS THE TOP OFF THE UNEMPLOYMENT PROBLEM OVERNIGHT, PUSHING THE UNEMPLOYMENT RATE DOWN BELOW 5% IN LESS THAN A MONTH!

OBAMA’S DOING IT ASS BACKWARD LIKE A REPUBLICAN! HE’S GOT THE PUBLIC PAYING FOR THE SCREW-UPS AND SCAMS OF THE BANKS! HE AIDING AND ABETTING A SYSTEM OF WELFARE FOR THE RICH! HE’S PROPPING UP PRICES INSTEAD OF LETTING THEM FALL QUICKLY AS POSSIBLE SO ADJUSTMENT OCCUR AND WE ARE QUICKLY ON THE ROAD TO RECOVERY! IT’LL CAUSE SHORT TERM PAIN BUT IS BETTER THAN THE LONG TERM TORTURE OBAMA IS SERVING UP! HELP OBAMA BY GIVING IT TO HIM STRAIGHT!

I’M NO MOSES, BUT IF I WERE, THE WORD WOULD BE TO TELL OBAMA TO LET OUR PEOPLE GO! STOP EXPECTING US TO MAKE BRICKS WITHOUT STRAW(JOBS)!

NO SPENDING, NO BANK LOANS, NO JOBS, NATIONAL DEBT INCREASES, HYPERINFLATION ENSUES, AND CHAOS FOLLOWS!

OBAMANOMICS IS A LOOOOOOOOOOOOOOOSER!

Posted by Icu_dude | Report as abusive

A coming age of austerity? Maybe

Jun 18, 2010 18:26 UTC

A Reuters Breakingviews column:

Europe’s newish cult of austerity may have some converts in Washington. The U.S. Senate is having surprising trouble passing a routine spending bill that grows the budget gap. Bipartisan resistance could hint that deficit hawks are starting to gain the upper hand in Congress.

The upper chamber rejected a bill that would have added $80-billion over 10 years to the national debt. Now that’s hardly a massive addition given the United States may tack on $10-trillion or more in total new debt over that period. The bill was also laden with politically popular goodies: more unemployment benefits, summer jobs for teens and the extension of an R&D tax credit for business. Yet 52 senators still rose to block the bill: 12 Democrats and 40 Republicans. The uprising has forced Finance Committee Chairman Max Baucus to scale back the legislation.

The Senate struggle should be a political reality check for White House critics who demand it propose a pricey plan to create jobs. Voters are growing ever-more concerned about ever-growing national debt. And Congress is clearly skittish about grandiose spending ideas such as one think-tank’s dreamy scheme to have Uncle Sam spend US$40-billion a year to directly hire the unemployed to renovate parks.

Indeed, as the failed vote shows, the Senate won’t even freely spend money on programs that were previously rubber-stamped even if not paid for. Now many in Congress are demanding new expenditures be offset by tax increases (such as on investment manager income) or spending cuts elsewhere. This attitudinal change may bode well for Obama’s deficit commission, charged with keeping America solvent.

But there may be two more immediate impacts. First, congressional leaders could be pressured to try to actually pay for permanently extending middle-class tax cuts due to expire at year end. Even a two-year extension for 2011 and 2012 would cost nearly $300-billion. Second, the hunt for revenue may result in bigger-than-expected hikes in investment taxes. The working assumption had been that dividend rates, for instance, would rise from 15% to 20% next year, not 40% as the budget currently presumes. But doing that would cost $25-billion a year. The outcomes of those battles will show if this new fiscal religion is more than just a passing fad.

Did Goldmans Sachs just douse Dems 2010 election hopes?

Jun 18, 2010 15:25 UTC

Liberal pundits and economists such as Paul Krugman have no use for the White House “Summer Recovery” PR tour. (Note that it isn’t called the “Prosperity Tour.”) They continue to attack the Obama administration for worrying too much about the budget deficit and too little about high unemployment. The White House response has been three-fold.

1) We’re not obsessed with the deficit. “That’s obvious,” Republicans would undoubtedly and snarkily reply, pointing out that under President Barack Obama budget’s plan, deficits would average $1.2 trillion a year for the rest of his term. But the serious White House point is that deficits are only an economic problem in the intermediate and long run. Certainly, both Obama administration and Federal Reserve officials argue, financial markets don’t seem too concerned at the moment given the continued low level of U.S. bond yields. That is why Obama hasn’t rushed to propose some immediate austerity program such as deep cuts in entitlements or a broad-based tax increase. America isn’t Greece. At least not yet.

2) There is no appetite in Congress to pass a pricey jobs bill. As the difficulty in getting the Senate to pass the deficit-expanding “jobs bill” reveals, debt fears are starting to take hold on Capitol Hill. (Or at least fears that voters are starting to worry about all the red ink.) Consider these failed Senate votes a reality check for liberal groups clamoring for a “New New Deal.” The union-backed Economic Policy Institute, for example, wants to spend $400 billion to create nearly 5 million jobs this year. The think tank would try and pay for it with a tax on stock, bond and currency trading. But there is little support for that in Congress, and even the Treasury Department thinks it a bad idea.

3) The labor market may just surprise you — and in a good way! There is a statistical relationship called Okun’s Law (really more of a rule of thumb) between GDP growth and job growth. A simple Okun analysis leads to the conclusion that the unemployment rate rose higher than was warranted given the severity of the Great Recession Why? Perhaps businesses, fearing another Great Depression, panicked and just hacked their workforces to bits. Okun’s Law was suspended, but only temporarily perhaps.

If one buys this theory, then eventually there should be some payback for that psychological overreaction. At some point soon, unemployment should fall way faster than what the rate of economic growth would indicate according to Okun’s Law. At least this is what the White House —  and congressional Democrats hope. And if they are right, the job market might well unexpectedly strengthen right into the November midterm elections, helping avert the worst for Democratic House and Senate incumbents. No Republican tsunami.

But a brand new study from the economics team at Goldman Sachs throws cold water on all this. Their analysis is that the deviations from Okun’s Law were within the historical norm, so no sharp rebound (bold is mine):

It is a common belief that employment and hours worked fell more sharply during and after the 2007-2009 recession than can be explained by moves in real GDP, or in more technical terms, that “Okun’s law”—the empirical relationship between jobs and GDP—broke down during and after the recession. Many forecasters believe that this implies a large amount of pent-up hiring, as the “error” in Okun’s law proves temporary and firms hire aggressively in order to return staffing levels to more normal levels relative to production.

In contrast, we have argued that the relationship between employment and GDP remains quite similar to past cyclical norms, and that employment growth will therefore follow GDP growth without a “special hiring dividend.” … The bottom line is that there is no convincing evidence for a breakdown in Okun’s law, and hence no particular reason to expect a large amount of pent-up hiring during the recovery. … Overall, we see no evidence for any meaningful deviation of the unemployment rate from its historical relationship with real GDP.”

And here is a chart to help visualize the point:

goldmanchart

Bottom Line: Unemployment of 9.5 percent or so for the rest of the year seems baked into the cake (this is what the Fed and the economic consensus see) unless GDP growth starts to boom. And good luck finding forecasters who believe that. So far, this recovery has fit into the slow-growth, New Normal paradigm. Although it was a deep recession just like in 1981-82, the recovery has only been half as robust. Voters may not blame Democrats for the Great Recession, but they will likely hold them accountable for the Not-So-Great Recovery.

COMMENT

Goldman Sachs has doused a lot of people’s hopes. Why would they leave out the Democratic Party?

Posted by HBC | Report as abusive

Here’s what’s missing

Jun 17, 2010 18:09 UTC

How to lower the unemployment rate. How …  to … lower … the unemployement … rate. Lesse, I dunno …maybe growth the economy faster? Here is a bit from the UCLA Anderson Forecast:

Significant reductions in the unemployment rate require real gross domestic product (GDP) growth in the 5.0 percent to 6.0 percent range. Normal GDP growth is 3.0 percent, enough to sustain unemployment levels, but not strong enough to put Americans back to work. As a consequence, consumers concerned about their employment status are reluctant to spend, and businesses concerned about growth are reluctant to hire.

The forecast for GDP growth this year is 3.4 percent, followed by 2.4 percent in 2011 and 2.8 percent in 2012, well below the 5.0 percent growth of previous recoveries and even a bit below the 3.0 percent long-term normal growth. With this weak economic growth comes a weak labor market, and unemployment slowly declines to 8.6 percent by 2012.

Tepid growth leaves plenty of excess capacity, subdued pricing power and very little inflation. This will allow the Federal Reserve to postpone interest-rate increases that the Forecast expects to come late this year or early next, as the sustainability of a modest recovery becomes clear and as the need for preemptive action against future inflation begins to dominate monetary policy decisions.

Me:  I know it’s easier said than done. But everything government does from now on needs to be optimized for growth.

COMMENT

It’s apparent from the recent employment stats that companies are really cracking the whip on their current employees, rather than bringing on more help. Average workweek hours are up, overtime up, factory workweek up and so on. Companies aren’t hiring, I would guess, because of the endless uncertainty emanating from Washington. Obama and his minions keep threatening new regulations, new taxes, new this, new that without any regard for the legitimate concerns of business over how much all this will cost. More and more I believe industry wants to hire but will wait until the dust settles in Washington. That means November at the earliest before the employment stats start improving.

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Why economy may not save 2010 Democrats

Jun 15, 2010 20:41 UTC

“Hope” wasn’t just a major theme of Barack Obama’s 2008 presidential campaign. It also might be a one-word summation of the 2010 midterm campaign strategy devised by the White House and Democrats on Capitol Hill. They hope voters get more comfortable with healthcare reform. They hope voters really care about the technocratic bank bill. And, most importantly, they hope voters begin to sense some impact of a slowly recovering economy on their personal financial situation.

Oh, and they sure hope the dang hole gets plugged, of course. It’s that last one that’s really biting Democrats at the moment. Obama’s approval rating, after more than a year on the downswing, had finally turned around in April. Then came the gusher in the Gulf. The president’s numbers are now at the lowest level of his presidency. According to weekly Gallup polling, just 46 percent of Americans approve of his job performance (with 46 percent disapproving). If history is a guide, Democrats will suffer heavy losses should Obama’s low numbers persist into November.

Certainly the BP “well control incident” — as the company might put it — is playing a big role in all this. Polls consistently show a ten percentage point gap between those who think Obama is blowing it vs. those who think he’s on top of things. And the closer voters are to the spill, the more critical they are. Just take a look at these numbers from Public Policy Polling. While Louisianans are way angrier with BP than Washington by 53 percent to 29 percent, they are pretty mad at both. By 50 percent to 35 percent, they now think President George W. Bush did a better job handling Hurricane Katrina than Obama’s job responding to the oil spill. Maybe Obama’s prime-time energy speech will turn things around. We’ll see.

But the prime shaper of the 2010 political backdrop is still the economy. A growing gaggle of economists now fret that growth will decelerate in the second half of 2010. Even bullish Ben Bernanke’s Federal Reserve is looking at a Plan B should the economy slow sharply. No double-dip recession, perhaps, but not enough economic oomph to dramatically lower the unemployment rate. In fact, it may again top the 10 percent level before year end. And if it doesn’t, the reason is more likely a shrinking labor force — as measured by government statisticians — than a surge of new jobs.

And the following numbers will only add to the sense of deepening Democratic gloom. A poll for NPR looked at the state of the races in 70 competitive House districts. Just 41 percent of voters favored Dems vs. 49 percent for the GOP. In the 30 most-competitive districts currently held by Democrats, Republicans led 48 percent to 39 percent. And in the 60 Dem districts overall, Obama had just a 40 percent approval rating.

But these results may be the ones most worrisome to Obamacrats in Washington. Only 37 percent of voters in the Dem districts believed the following: “President Obama’s economic policies helped avert an even worse crisis, and are laying the foundation for our eventual economic recovery.” On the other hand, 57 percent agreed with this statement: “President Obama’s economic policies have run up a record federal deficit while failing to end the recession or slow the record pace of job losses.”

In Washington, they call that “losing the narrative.” Democrats can only hope they can somehow get it back.

COMMENT

The reasons why Dems are losing are as follows: (1) they’re supposed to be Democrats, not Republicans, (2) they seem incapable of explaining anything simply and clearly, (3) they are spineless, (4) they are clueless, and (5) they have sold out to big business.

The ONLY reason why Democratic candidates will win against a Republican opponent is because the Republicans are choosing people who are completely insane.

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The U.S. state budget shortfall in a picture

Jun 14, 2010 20:08 UTC

This, from the Center on Budget and Policy Priorities:

stategap

The Dirty Shirt Theory and the Keynesian Endpoint

Jun 14, 2010 18:34 UTC

From Ed Yardeni:

The bears are mostly, and rightly, concerned that many economies around the world are overly leveraged. They claim that both private and public debt burdens are so great now that they are depressing economic growth. This has the potential to cause a deleveraging death spiral for the global economy according to the most bearish of the bears. The bulls believe that the global economic recovery has plenty of forward momentum and is self-sustaining even if many governments are forced to implement austerity measures to placate the Bond Gods.

Speaking of the Bond Gods, I was surprised that the clever folks at Pimco weren’t mentioned in the Businessweek article on the leading stock market bears. They are the ones who coined the phrase “The New Normal,” describing an economic outlook of structurally weak economic growth and persistently high unemployment. They argued that the stock market rally over the past year was a “sugar high.” Last week, they rolled out the “Keynesian Endpoint.” The gist of this concept is that many governments have maxed out their credit lines. As a result, they can no longer borrow as much as they need to prop up their flagging debt-burdened economies. So their only remaining policy options are to devalue their currencies and to restructure their debt, i.e., default. Pimco apparently likes the dollar and U.S. Treasuries because the U.S. is the “least dirty shirt,” according to Pimco’s Bill Gross in a June 4 radio interview on Bloomberg Surveillance with Tom Keene.

Me: Of course, this was the obvious flaw with all the Return to Big Government talk. Such a return is fiscally unsustainable. Markets will prevail.

Bill Gates’ Big Government plan for clean energy ‘miracle’

Jun 14, 2010 15:26 UTC

Bill Gates and a bunch of other top corporate executives want Uncle Sam to spend a lot  more on clean energy research and development. Here’s why:

Energy innovation is a commitment to long-term prosperity. If the United States invests in its clean energy future now, our nation can reap immense benefits. We have seen this work in other sectors, and it can work in energy. Public- and private-sector innovators have made miracles happen right here on home soil—Americans developed the computer and the Internet, delivered air and space travel and decoded the human genome. Standing on their shoulders, we can see a clean energy future within reach. By scaling the good technologies of today and discovering new technologies that do not yet exist, we have an opportunity to achieve a similar miracle in energy.

So they have created a new group to push their agenda, the American Energy Innovation Council. Here are some of its members:

Norm Augustine, former chairman and chief executive officer of Lockheed Martin; Ursula Burns, chief executive officer of Xerox; John Doerr, partner at Kleiner Perkins Caufield & Byers; Bill Gates, chairman and former chief executive officer of Microsoft; Chad Holliday, chairman of Bank of America and former chairman and chief executive officer of DuPont; Jeff Immelt, chairman and chief executive officer of GE; and Tim Solso, chairman and chief executive officer of Cummins Inc. The Council is advised by a technical review panel consisting of preeminent energy and innovation experts and is staffed jointly by the Bipartisan Policy Center and the ClimateWorks Foundation.

And group has five big recommendations:

1) Create an independent national Energy Strategy Board; 2) Invest $16 billion per year in clean energy innovation (vs. $5 billion currency); 3) Create Centers of Excellence with strong domain expertise; 4) Fund the Advanced Research Project Agency-Energy at $1 billion per year; 5) Establish and fund a New Energy Challenge Program to build large-scale pilot projects.

And this is how they plan to pay for it:

When there is a system to reduce greenhouse gas emission in the United States, it will likely generate revenue—in the form of permit sales, for example. The first $16 billion of these greenhouse gas revenues should be devoted to RD&D— because new technologies will make it far cheaper to reduce emissions. This is a virtuous cycle. The United States employs other user fees on the energy system today that could be expanded. Wires charges (a small fee on electricity sales) are a natural way to finance improvement in the electric sector, just as gasoline taxes pay for transportation infrastructure. Reducing today’s subsidies to fossil fuel industries could also cover much of the distance.

Me: Why, exactly, do they think this will work? Granted, when you are talking about trillion dollar deficits, this is not a great deal of money. So maybe it is worth taking a flyer. But the evidence would indicate it is a long-shot at best. A 2003 OECD study on what drives economic growth in advanced economies found “no clear-cut evidence” that government R&D — as opposed to private sector R&D — provides any economic benefit.

What does boost economic growth, according to that study? Avoiding this scenario, for one thing: “For example, high personal income tax rates can discourage entrepreneurship since entrepreneurs are self-employed and/or managing unincorporated businesses, whose profits are taxed through the application of a progressive rate schedule to personal income.”

COMMENT

Just to throw the conspiracy cookie in here: why do you think private industry would not stifle creative clean energy research as they have for the last 80 years? This is why government-sponsored research, with appropriate oversight, through private contractors could yield better results than a straight-up free market program.

Of course the interference could always be done (as it is now, also) through lobbying efforts, but it’s much easier and cheaper to buy competitors than congressmen.

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US ready may become world’s highest corporate taxer

Jun 14, 2010 14:21 UTC

The US has the second highest corporate tax rate among advanced economies. But maybe not for long. Tell the people the bad news, Reuters:

Japan’s ruling Democratic Party will seek a reduction in corporate tax to encourage economic growth as part of its platform in upcoming upper house elections, Japanese business daily Nikkei reported on Saturday. Without citing any sources, the daily said the Democrats want to cut corporate tax in order to increase the global competitiveness of Japanese companies. Rates charged to Japanese firms are high compared with other countries, Nikkei reported. Japan’s corporate tax is around 40 percent, about 10 to 15 percentage points higher than taxes in EU nations and countries like neighbouring South Korea, it said.

Scott Hodge of the Tax Foundation finds this peculiar:

On the same day that Japan’s Nikkei business daily is reporting that the Japanese “government is aiming to cut tax on company earnings by five percentage points next fiscal year,” the Wall Street Journal is reporting that “Democrats are trying to boost their political fortunes ahead of this year’s midterm elections by attacking corporate tax rules they say encourage U.S. multinationals to send jobs overseas.”

Me: What the US should be doing is putting a long-range deficit reduction plan into place and then boosting growth through cuts in corporate and capital tax rates.

Obama budget cuts only a start

Jun 9, 2010 19:39 UTC

Cutting 5 percent of optional government spending won’t plug America’s fiscal hole. Still, President Barack Obama’s proposal may buy a bit more time with nervous financial markets. It could even kick-start a needed rationalization of government outlays. Every little helps — but Obama needs to go further.

The tweaks that Obama seems to be calling for land well short of the big cost-cuts eventually needed to get the U.S. budget in order. They would affect only discretionary spending unrelated to security, and only starting in 2012. In that year, the projection for such expenses (outside defense and homeland security) is roughly $600 billion. So a 5 percent cut would be $30 billion, or 0.2 percent of GDP. The budget deficit that year is expected to be $915 billion, or 5.8 percent of GDP, according to the Congressional Budget Office. The cuts, in other words, would easily disappear in the overall deficit forecast’s margin of error.

Entitlements are where the real money is. A 5 percent cut in health and pension programs, for instance, would amount to $105 billion. And such “mandatory” spending will increasingly dominate. Currently, this category of spending is half as large again as all discretionary spending. By 2020, that ratio could expand to 120 percent unless Obama’s deficit commission is able fashion a set of entitlement reductions acceptable to Congress.

Then again, even small cuts in wasteful or inefficient discretionary spending are good news. Obama also wants federal agencies to identify their poorly performing programs, an effort to force them to measure and critique performance — and cut expenditure that doesn’t get results.

And Obama has plenty more scope. Defense spending is half of the total discretionary category. Some Republican budget hawks might even applaud well-chosen cuts. And reducing the federal workforce by 25 percent would save $650 billion by 2018, according to simulations run by the Committee for a Responsible Federal Budget. Eliminating earmarks — self-serving pork slipped into spending bills by members of Congress — would save another $160 billion by that year. It would also show the public that Congress takes austerity seriously.

The 5 percent cuts may be at least 50 percent PR. But if they make voters more willing to accept future fiscal pain, they are 100 percent a good start.



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