A federal balancing act

Call it Congress’ version of “lather, rinse, repeat.” Last week, lawmakers approved a short-term extension of unemployment benefits after overcoming yet another GOP filibuster, the third such extension since December. The extension lasts only until early June, so Congress may soon be going through the same routine again. Republicans object to borrowing money to finance the extra benefits, while Democrats refuse to offset the additional spending by cutting other parts of the budget. The GOP is right about the threat posed by the burgeoning federal deficit. But Congress won’t resolve it by dickering over emergency spending programs designed to spur the flagging economy. The real problems are far larger, and they require more political courage to tackle.

There have been two points of contention lately about unemployment insurance. Outside the Beltway, some economists and pundits have questioned the value of sending checks to the unemployed, arguing that it encourages laid-off workers to be too choosy about job openings and cling to unrealistic wage demands. Some researchers have found that the longer the benefits last, the less likely workers are to take jobs that pay significantly less than their previous positions. But though that may be true for some workers, for many others the opportunities to go back to work just aren’t there. There were 5.5 job-seekers for every opening in February, or almost twice as many as at the peak of the last recession.

Congress, however, hasn’t spent much time debating these issues. Instead, it has temporarily increased the maximum available coverage from 46 weeks, which is what state programs provide in the hardest-hit areas, to 99 weeks in those states. One rationale is that these benefits stimulate the economy during a recession. Layoffs drive down consumer spending, which can lead to more layoffs as economic activity slows and businesses respond to shrinking demand. It’s a vicious cycle. Unemployment benefits, which now average $335 a week, help to counteract that trend.

The economy is on the mend, as evidenced by stronger corporate earnings and increased consumer spending on big-ticket items, such as cars and furniture. And anxiety about federal spending is growing, as evidenced by the enduring popularity of the “tea party” movement. Seizing on this sentiment, Senate Republicans sought in February and again last week to pay for the continuation of unemployment benefits by trimming other programs or raising taxes. Doing so, however, would neuter the stimulative effect of the benefits. And the economy just isn’t ready for Washington to take its foot off the fiscal gas.

Unemployment remains twice as high as it was before the housing crash. Credit problems linger for businesses. Homeowner defaults and foreclosures continue at a rapid pace, with commercial real estate teetering. Barely enough jobs are being created to keep pace with the growth in the population of working-age adults, let alone put folks back to work. As chief economist Mark Zandi of Moody’s Analytics warned the Senate Finance Committee last week: “Until businesses resume hiring in earnest and unemployment moves definitively lower, it is premature to conclude that a self-sustaining economic expansion is under way.”

That’s not to say that Congress should put off grappling with the deficit and debt problems until unemployment is as low as it was before the housing bubble burst. There are important steps lawmakers can take now to bring the budget back into balance over the long run, ones that won’t conflict with the ongoing efforts to stimulate the economy. But they’re difficult.

For starters, lawmakers can begin addressing the looming problems in Social Security, Medicare and Medicaid. These entitlement programs account for almost 60% of federal spending, and their share is projected to grow dramatically after 2015. Bringing Social Security spending under control is a fairly straightforward task, albeit an unpleasant and politically risky one. Some of the options bandied about include raising the retirement age, slowing the rate at which benefits grow, raising the cap on payroll taxes and trimming some payments to the wealthy. The threats posed by Medicare and Medicaid would be harder to address, given that they are tied to rising healthcare costs. The recently enacted healthcare reform law includes a number of provisions that should slow that inflation, but it’s not clear how much they’ll help or how long it will take.

Budget analysts have been warning about these problems for more than a decade, to no avail. The longer Congress waits to tackle these issues, the harder they will be to solve. Obama has appointed a bipartisan commission to develop a plan to shrink the deficit significantly by 2015; its first meeting is later this month, with recommendations to Congress due by the end of the year. But the prospects of lawmakers acting on any deficit-reduction plans were thrown into doubt in January, when the Senate killed a proposal for a similar commission whose recommendations would be guaranteed an up-or-down vote in Congress.

Another step lawmakers could take would be to revive an idea from President Reagan’s second term in office, when a bipartisan group of lawmakers set out to simplify the tax code. The resulting Tax Reform Act of 1986 eliminated many loopholes and breaks that lobbyists had extracted from Congress, broadening the tax base and imposing more equal burdens on taxpayers of similar means. Those steps made it possible to lower rates without sacrificing revenue or progressivity. In the years since then, much of that work has been undone, resulting in a tax code that’s more complex, less fair and less efficient. Lawmakers have already started ratcheting up tax rates; the healthcare overhaul included $438 billion in higher excise and income taxes over 10 years. And Obama has called on Congress to renew only a portion of the tax cuts that President George W. Bush championed, allowing the top two tax brackets and the estate tax to rise back to their levels from a decade ago. Such a piecemeal approach exacerbates the complexity of the tax system. Lawmakers would be better off overhauling the tax code with an eye toward what was accomplished two dozen years ago.