I’m not sure it adds a lot of value for me to go point-by-point rebutting each of Mr. Morgan’s responses to my original technical points. He is right that we agree in some areas, even though he doesn’t highlight all areas of our agreement. I am sorry to say that where we still disagree his responses have not convinced me to change my original critiques.

While I therefore stand by each point of my original critique, I think it’s most helpful if I highlight a few points on which we agree, and then explain again only the most important reasons why I continue to recommend policymakers ignore this study and its headline number.

Where Heritage and I agree

Heritage highlighted a few important points of agreement, as well as a few other smaller ones.  We agree on the following.

• Making legal those now here illegally would increase government spending and deficits. This is because much of this population is low income, and the benefits they would receive from government exceed the taxes they would pay.
• Therefore, as Heritage frames it, “amnesty will cost taxpayers.”
• It is highly unlikely that the additional economic growth resulting from making these folks legal would offset these costs, especially since governments would capture only a small fraction of that additional growth.

If you read Mr. Morgan’s response carefully you can see that Heritage agrees with several other points I have made.

As best I can tell, Heritage and I agree on the following.

• Heritage’s $6.3 trillion headline number does not represent their estimate of what they label as “amnesty,” but instead something different.
• This number includes the costs of government services now being used by 8-9 million people here illegally.
• This number includes current and ongoing costs of 4.5 million U.S. citizen children. These costs would remain if you could somehow find and deport everyone now here illegally.
• While this number includes a one-time +5% bump in income (I missed this), it ignores future skill and income growth of newly legal U.S. citizens, and the effects of that growth on the budget.
• This number excludes the supply-side effect of increased labor from newly-legal Americans who would have more ability to work and for some take higher-skilled jobs that better match their abilities and training.
• This number ignores the time value of money and treats an inflation-adjusted dollar of costs 50 years from now as equivalent to a dollar of costs today.

The baseline & citizen kids disagreements

Heritage and I disagree on what numbers are relevant for policymakers. I argue that the relevant number for policymakers is the incremental cost of what is now being debated in Congress, eventually making legal those now here illegally. (Heritage calls this “amnesty,” I shy away from that term.) This increment, I argue, should be measured relative to current policy: the reality that 8-9 million people are in the U.S. today, using government services and imposing fiscal costs on governments.

Heritage argues policymakers should also know the cost of the proposed policy relative to a state of the world in which illegal immigration had never occurred. How can that possibly be relevant to any policy decision now being debated? That illegal immigration did occur, and those people are here now. Even if you somehow had a way to find every illegal immigrant, deport him or her, and perfectly prevent all new illegal immigration, what are you going to do with 4.5 million U.S. citizen children? Deport them too? That’s what the Heritage study tries to estimate.

While Heritage or some policymakers might prefer that state of the world, it’s impossible to get there from here, both because we don’t know how to find and deport everyone, and because you can’t undo the existence of 4.5 million U.S. citizens. It is therefore an irrelevant basis for comparison.

Some may argue, “How can it hurt to know this additional number, even if it’s kind of silly and not relevant to the current choice being considered by Congress?” It hurts because reporters, policymakers, and Heritage shorthand things, and policymakers mistakenly substitute the useless number for the useful one. That is definitely the case here. Unless you are scrupulously reading the report’s footnotes (or my blog), you’d never know that Heritage most of the time does not actually claim that $6.3 trillion is the cost of the “amnesty” provisions in the Gang of Eight bill.

This confusion, which always exists in real-world legislative processes, makes a misleading number harmful. If this confusion is intentional, then it’s deception and highly irresponsible.

The costs of more poor Americans

I think Heritage and I are pulling in roughly the same direction on concerns about our enormous and unsustainable entitlement state. The Heritage work on illegal immigration focuses on the additional fiscal costs of having more poor Americans. I am willing to bear some (I said some) additional fiscal costs of making legal those here legally if it’s part of a long-term solution that dramatically reduces the flow of future illegal immigration, and if that solution significantly expands our high-skill immigration.

At the same time, I think parts of our low-income support structure are seriously fouled up. I’d highlight three big concerns: the explosion of food stamp eligibility in recent years; the explosion of those claiming disability insurance; and the insanely high effective marginal tax rates on some low-income workers as their income climbs and they lose eligibility for government benefits. I think all three problems should be high priorities for policymakers to fix.

I place an even higher priority on dialing back quite dramatically the taxpayer subsidies for the broadly defined “middle class” in the form of old-age entitlements and now new health insurance subsidies. Because they are bigger and apply to so many more people, these unsustainable middle class benefit promises are even more fiscally damaging than the low-income subsidies so often highlighted by Heritage.

And I think I differ from Heritage in that I see both of these solely as problems of our entitlement state, not as costs of illegal immigration. Let’s fix the whole immigration system and offer new, better structured, fiscally sustainable entitlement promises to the middle class and the poor. Let’s not use fouled-up entitlement spending structures as an excuse not to improve immigration policy.

The fatal flaw:  No discounting

For me the fatal flaw in the Rector-Richwine paper is not accounting for the time value of money. I applaud Heritage for trying to estimate the long-term costs of immigration policy, and I am a proponent of long-term cost estimates (especially for old-age entitlement programs where they are most relevant). Heritage repeatedly refers to its “exhaustive” study, a “100 page paper” that contains “a complex analysis of 34 categories of taxes and 73 expenditure categories.” But if your study tries to examine costs over a 50-year timeframe and you’re not doing a net present value calculation, everything else is moot. You are overestimating lifetime costs by nearly a factor of two simply by not discounting future costs and benefits. You undercut the rest of your hard work by ignoring this elementary principle.

Sorry, Heritage, it’s still not a useful number

Estimating the costs of making legal those here illegally is difficult. Well-intentioned estimators will take different approaches to the same problem. But when you estimate the costs of the wrong population, compare it to a fanciful/impossible baseline, and ignore the time value of money, your headline number adds no useful information to the immigration policy debate. Each of these problems leads to an overstatement of the cost, as does each other smaller concern I highlighted with the paper and op-ed. When those flawed conclusions are then further misrepresented as the “Cost of Amnesty,” real harm is done to the policy debate on an important national issue.

I continue to recommend immigration policymakers ignore the Heritage study and especially its $6.3 trillion headline number. Ask CBO for an estimate instead.

In a little over three years, our businesses have created more than 6.5 million new jobs.

… Corporate profits have skyrocketed to all-time highs.

… Our housing market is healing.

… And our deficits are shrinking at the fastest rate in decades.

If you studied my post last Wednesday on the CBO baseline update, this should strike you as an odd boast.

CBO projects that under current law we would have a deficit of 4% of GDP for 2013, meaning that our debt/GDP will continue to rise. CBO further projects that under the President’s budget we would have a deficit of 4.2% of GDP for 2013, slightly higher than their projected deficit under current law.

President Obama’s words:  Our deficits are shrinking at the fastest rate in decades.

Translation 1:  The rate at which we’re rolling backwards is slowing dramatically.

or Translation 2:  Our debt problem is getting worse much more slowly than in recent years.

That is not something you should boast about.  You’re supposed to boast when things are getting better, not when they’re getting worse more slowly.

CBO projects that revenues will increase significantly from last year (2012) to this year (2013) for three reasons:

• The tax increases legislated in the January 2nd “fiscal cliff” law;
• Some taxpayers realized their income in late 2012 rather than 2013 in anticipation of 2013 rate increases;
• For other reasons, personal income increased from 2012 to 2013.

These are all reasons why the U.S. Government is projected to collect significantly more revenues in 2013 than it did in 2012. In my earlier post I had mistakenly said these were reasons why CBO’s most recent baseline update had increased from January/February until now.

CBO’s Jan/Feb baseline document (and, indeed, their August baseline update last summer) had already incorporated tax increases scheduled to occur under then-current law. CBO did not leave them out of their Jan/Feb projection as I wrote earlier.

CBO’s revenue projection increased from their Jan/Feb baseline document to now simply because they have increased their estimate of the magnitude of the second factor listed above.

I apologize for any confusion I caused. While it’s important that I correct this, the error and correction don’t change the fundamental lessons from that post.

You can see the corrected post here.  Thanks to a friend for pointing out my mistake.

CBO released their updated economic and budget baseline today, in advance of their estimate of the President’s budget due out later this week. At first the headline sounds like good news: the deficit for this year will be “only” $642 B, 4% of GDP. That’s about $200 B smaller than CBO projected for this year in their January baseline document. Should we celebrate?

No, not unless you like the “fiscal cliff” tax rate increases and you like the government owning Fannie Mae and Freddie Mac. Those are the reasons why the deficit projection declined.

Deficits and Debt

You should know three benchmarks when thinking about federal budget deficits, each measured in % of GDP:

1. A roughly 3% deficit will hold debt/GDP constant;
2. The historic average deficit (pre-2008 crisis) is about 2% of GDP; and
3. Of course, a balanced budget is zero deficit.

Any time you hear a deficit number, compare it to zero, two and three, and you’ll have a good feel for where we are. A 4 percent deficit for this year is not good: it’s almost twice as high as the historic average, and it’s high enough that our debt will continue to increase faster than our economy will grow.

You will hear “But that 4 percent projection is much lower than the 5.4% projected in January. Surely that’s good news.  It is certainly an improvement over where we thought we were this year.”

This is where we need to review levels, rates of change, and expectations. This is tricky so I’ll break it down into small steps.

• The level of our debt/GDP is quite high: 73% at the end of last year.  That’s bad, and there’s a debate about just how bad it is.
• The deficit is the change in our debt for this year. A deficit means our debt is increasing, and a deficit greater than 3% of GDP means our debt is increasing relative to our economy. So our level is high (bad), and because our 4% deficit is greater than the 3% benchmark, our level is increasing (getting worse).
• But it’s getting worse much more slowly than it was getting worse a few years ago. In 2009 the deficit was 10% of GDP.  With a 4% deficit this year, our situation (level, debt/GDP) is getting worse much more slowly than it was four years ago.
• That does not, of course, mean we’re in a better position (debt level) than four years ago. Our debt/GDP at the end of 2008 was 41%. At the end of last year it was 73%, and CBO projects it will increase to 75% at the end of this year. That our debt is growing much more slowly this year than it was four years ago is hardly cause for celebration.
• Looking for a silver lining, our projected deficit (4%) is significantly smaller than was projected just four months ago (5.4%, projected in January). It is therefore a better (less bad, really) number than prior expectations.

I know that’s probably more complicated than you want.  Sorry, best I can do.

Why did the projection change so much?

Update:  I struck a lot of text from the original version of this post, in which I misread the reasons why CBO’s revenue projection went up.  The correct version is in green here.

• Based on tax data collected through April of this year, both income and corporate tax collections on income earned in 2012 (and therefore collected in 2013) are coming in higher than CBO anticipated;
• and Fannie Mae and Freddie Mac, now quite profitable, are making big dividend payments to the Treasury. These payments show up on the outlay side of the federal budget ledger, but they are in effect receipts of the U.S. government.

CBO’s best guess at this point is that the first factor is because taxpayers realized more income in late 2012 (rather than in 2013) in anticipation of 2013 rate increases than CBO had originally anticipated.

The other big consequence of the nature of these changes is that they are mostly one-time bumps. So the 2013 numbers improved quite a bit, but the numbers for following years don’t increase nearly as much.

Enough already! How should I feel about this?

If you supported the tax rate increases then this is marginally good news. But don’t celebrate; our fiscal picture is still grim.

If, like me, you hate tax rate increases on anyone and detest having the government own two massive mortgage finance companies, then you should feel no comfort from today’s deficit news, which is almost entirely the result of those policies. I’d happily return to a 5.4% deficit if you let me repeal the tax rate increases and replace Fannie & Freddie with a private mortgage securitization market.

And then I’d cut government spending.  A lot.

The key substantive point of the paper and op-ed is a $6.3 trillion number:

An exhaustive study by the Heritage Foundation has found that after amnesty, current unlawful immigrants would receive $9.4 trillion in government benefits and services and pay more than $3 trillion in taxes over their lifetimes. That leaves a net fiscal deficit (benefits minus taxes) of $6.3 trillion.

I expect making 8-9 million people here illegally into U.S. citizens would increase future deficits once these people are eligible for benefits. But there are so many problems with the Heritage study that this $6.3 trillion number is useless for making policy decisions. It might as well be plucked out of thin air.

Others have criticized the Heritage study, including a detailed critique from Cato’s Alex Nowrasteh. I’m adding to that here.

The basics of estimating government expenditures for an entitlement program are simple.

1. Figure out the number of people who will receive subsidies;
2. Figure out how much the government will spend, on average, per person per year;
3. Choose your timeframe, measured in years;
4. Multiply (1) by (2) by (3) and you’re done.

The Heritage study makes errors in each step.

1. The study purports to measure the “cost … of amnesty.” Let’s set aside whether amnesty is the appropriate word to describe what is in the Gang of Eight’s bill. The fiscal cost of “amnesty” is the incremental cost of making those here illegally eligible for government payments and services relative to what we have now. People here illegally are already imposing fiscal costs by driving on the highways, using public parks, relying on local firefighters for emergency services, and in some cases receiving uncompensated care in emergency rooms. Some children here illegally are already receiving free public education. Making those children U.S. citizens doesn’t increase the cost to the state of educating them.

There are significant incremental costs to amnesty, mostly from millions of people eventually becoming eligible for Social Security, Medicare, Medicaid, food stamps, and cash assistance.

But in addition to these incremental costs, Heritage incorporates all of the baseline costs in their $6.3 trillion estimate of “amnesty.” By measuring total rather than marginal costs, they are telling us the cost of making millions of people legal relative to the cost of somehow finding and deporting all of them. Setting aside my view that such an alternative is infeasible, it is inaccurate to describe such an estimate as the cost of amnesty. It is instead the cost of amnesty relative to some other state of the world that Heritage would prefer. That is both misleading and not particularly useful to policymakers.

The study authors acknowledge this. On page 29 of they write:

The $6.3 trillion figure represents the lifetime fiscal costs of unlawful immigrant households after amnesty. It does not represent the increased fiscal costs caused by amnesty alone. The increased lifetime costs caused by amnesty would equal $6.3 trillion minus the estimated lifetime fiscal costs of unlawful immigrant households under current law.

The killer problem comes with the way Heritage is marketing the study. $6.3 trillion is Heritage’s estimate of the total costs of illegal immigrants if “amnesty” is granted. But the op-ed is titled “What amnesty for illegal immigrants will cost America,” and the op-ed says “amnesty has a substantial price tag,” thus mistakenly presenting $6.3 trillion as the marginal cost of a proposed policy change. The study says one not very useful thing, while the op-ed markets the study’s results as something else entirely.

2. In addition to not being an estimate of the cost of “amnesty,” the $6.3 trillion number does not measure the cost of illegal immigrants, either. The study includes a number calculated from looking at 12.7 million people, then labels that the cost of “illegal immigrants.” Contained within those 12.7 million people are 4.5 million children born in the U.S. to at least one parent here illegally. These children are U.S. citizens. Heritage is inflating the population of “illegal immigrants” measured by 55% = (4.5 / (12.7 – 4.5)).

The Heritage logic is that those 4.5 million children are in the U.S. only as a result of illegal immigration, so the costs of providing them with taxpayer services are costs of illegal immigration. Heritage is correct that, had those 8.2 million adults here illegally never arrived, those 4.5 million children would not have been born in the U.S.

But you can’t unring the bell. Whatever your view on whether policy failed by granting citizenship to the U.S.-born children of an illegal immigrant, these children are now U.S. citizens and entitled to benefits (and with the requirement to eventually pay taxes). The fiscal costs of these citizen children can’t be counted as the cost of “amnesty for illegal immigrants,” since (a) they are being paid now and (b) they will continue to be paid even if their parents do not get benefits.

At best Heritage’s estimate is not the cost of “amnesty” for illegal immigrants. It is an estimate of the cost of “amnesty” for 8.7 million illegal immigrants plus the costs of benefits for 4.5 million U.S. citizen children.

While the study acknowledges that their estimate depends heavily on this unusual redefinition, the op-ed and Heritage’s subsequent promotional efforts do not. In the study the authors carefully acknowledge:

For example, any study that excludes the welfare benefits and educational services received by the minor U.S.-born children of unlawful immigrant parents from the costs assigned to unlawful immigrant households will reach very different conclusions about the fiscal consequences of illegal immigration.

The DeMint/Rector op-ed makes no such distinction and is factually incorrect because it includes the benefit spending for 4.5 million U.S. citizens (emphasis added by me):

… current unlawful immigrants would receive $9.4 trillion in government benefits…

As we’ll see next, the study is also not really a complaint about the fiscal effects of illegal immigrants, or even of immigrants generally. It is instead a complaint about low income people receiving net government subsidies.

3. The logic behind the study can be summed up like this:

• Poor U.S. citizens cost the government money because they receive more in benefits than they pay in taxes;
• Immigrants tend, on average, to be fairly low on the income scale;
• Illegal immigrants even more so; therefore
• Making illegal immigrants legal (at some point) will therefore increase future deficits.

But other than the “even more so” point, this isn’t really an argument about illegal immigrants. It’s an argument about the existence of low-income Americans, a redistributive safety net and old-age subsidies, and an income tax system that exempts about 45% of Americans from paying income taxes.

Senator DeMint and Dr. Rector write:

Yet immigrants should come to our nation lawfully and should not impose additional fiscal costs on our overburdened taxpayers.

I agree with the first part, but they run into trouble on the second.  If you believe their numbers, legal immigrants also impose additional fiscal costs on our overburdened taxpayers.

The Heritage logic would apply equally to legal immigrants and to babies born to low income U.S. citizens. I know Heritage is not opposed to either of those, but the logic of this study (and the language in the op-ed) would seem to lead to such a conclusion.

4. Even more generally, the study is actually a critique of our unbalanced federal budget for everyone, and not just for the poor, much less for a subset of the poor. The federal budget is terribly out of whack, the result of promising way too many entitlement spending benefits without raising the taxes needed to pay them. (I would of course solve this by changing the spending promises, not by raising taxes.) Entitlement spending promises to seniors are the largest cause of this problem and are the drivers of unsustainable federal and state government spending trends.

Illegal immigrants are being promised far more in benefits than they will pay in taxes not just because they are on average low income, but because almost everyone is being promised old age benefits that will exceed the taxes they will pay.

In addition, Heritage’s calculations mistakenly assume that Social Security and Medicare benefits will be paid in full to newly legal immigrants for the next 50 years, even though (a) it’s obvious that neither program’s spending is sustainable in its current form for even half that time; and (b) current law includes a mandated 27% cut in Social Security benefits once the Social Security “trust fund” has a zero balance, and a 13% cut in Medicare part A benefits when the Hospital Insurance “trust fund” hits the wall. As a result, Heritage’s estimates of the direct old-age benefit costs for newly legal immigrants are too high.

5. The authors do a lot of work to group illegal immigrants by educational level (as a proxy for income) and to estimate the fiscal costs for various eligibility phase-in timeframes. But, as best I can tell, they assume that a poor, low-skilled, poorly educated illegal immigrant will remain poor, low-skill, and poorly educated, and that he will draw government subsidies his entire life. Incomes typically climb as a worker ages (including for low-skilled, low-wage workers). Some people who arrive in the U.S. illegally may initially take jobs well below their skill level because of language barriers that they later overcome. Others will get further education or build skills over time. Since government subsidies relate inversely to income, if you assume illegal immigrants will never see their education, skills, or income increase, then you’ll overestimate the government subsidies spent on their behalf and underestimate the taxes they pay. Ignoring the potential for self-improvement and economic advancement inflates the cost estimate.

Let’s not forget that those here illegally are the subset of those back home who had some combination of skills, determination, and savvy to make it to the U.S. despite significant barriers.

6. More broadly, the fear of discovery and deportation has to constrain the labor supplied by those here illegally. A talented electrical engineer here illegally might now be working in an unskilled job because green card verification is weaker for driving a cab than for working at Cisco or Intel. A spouse here illegally might choose to stay at home with the kids rather than seek paid work because the former has significantly lower risk of being discovered by immigration authorities. Eliminating these deportation risks will increase the available labor supply. Increased labor supply means a larger GDP, a larger tax base, and higher government revenues. Heritage appears to ignore all these supply-side labor effects, which is unusual from an organization that in other contexts has championed consideration of supply-side effects in fiscal estimates.

7. To get their huge numbers Heritage sums up spending over a 50-year period. They adjust their estimates of future spending and taxes for inflation but not for the time value of money.  Most official legislative cost estimates are done for a 5 or 10-year period, in which these effects are small and customarily ignored. But nobody adds up a 50-year fiscal stream without either discounting it or measuring it as a % of GDP rather than in real $. Using a 3% real long-term interest rate (CBO’s assumption), a dollar of cost 50 years from now is equivalent to a 23¢ cost today. Heritage counts this cost as a dollar rather than 23 cents. They should be showing us net present values if they want to do long-term estimates. It’s tough to say exactly, but a back-of-the-envelope calculation suggests this almost doubles their final number.

8. Finally, the DeMint/Rector op-ed purports to describe what illegal immigrants “will cost America,” when in fact they are looking only at what they will cost American governments. This is an important oversimplification and a surprising one from an institution as reliably conservative as Heritage, which I would never expect to make the mistake of equating the Government with the Nation. I happen to think the cultural and non-governmental economic benefits of a robust immigration system and a resolution of the problem of a stock of 8-9 million people here illegally far outweigh the likely impact on the federal budget, but you might make a different judgment call. Either way, it’s obvious that the federal budget is only part of the calculus, and the op-ed erred in suggesting otherwise.

To summarize, the $6.3 trillion number offered by Heritage as “the cost of unlawful immigrants and amnesty”:

• Does not estimate the marginal cost of an amnesty program or whatever is in the Gang of Eight bill relative to anything other than a fantasy state of the world;
• Includes costs for 4.5 million U.S. citizen children in its estimate of the costs of illegal immigrants;
• Employs logic extensible to both legal immigrants and poor U.S. citizens, and thus is actually a critique of government tax-and-spending redistribution more than of illegal immigration;
• Mistakenly assumes that unsustainable Social Security and Medicare benefits will be paid to newly-legal immigrants for 50 years when both programs will go bankrupt long before;
• Ignores supply-side labor effects by mistakenly assuming that an illegal immigrant who is poor and receiving government benefits will remain poor for 50 years, that he will not learn new skills or increase his income, and that he will not find a better-paying job or take additional work after eliminating the risk of deportation;
• Ignores the time value of money; and
• Mistakenly labels the cost to the Government as the cost to the Nation, ignoring the cultural and non-fiscal economic benefits and costs of changing immigration policy.

There is a significant fiscal effect from making 8-9 million people into U.S. citizens and making them legal taxpayers and eventually beneficiaries eligible for the full panoply of government subsidies. But Heritage’s $6.3 trillion figure is not a good estimate of that effect and is useless for making policy decisions.

I am a fan of Heritage and respect many of their scholars and their policy work. Unfortunately this study and op-ed are not up to their usual standard. They subtract value from an informed policy debate about an important topic.

In the mid 2000s Fannie, Freddie, and their hordes of lobbyists were able to delay GSE reform legislation until it was too late to do any preventive good. Despite the efforts of President Bush to push aggressive reforms for several years prior, legislation was enacted only in July 2008 as the firms were in the process of imploding. Congress allowed the barn doors to be closed only after the horses had escaped.

For GSE reformers the most important vote was on a bipartisan May 2007 House floor amendment by Rep. Randy Neugebauer (R-TX) and Rep. Melissa Bean (D-IL).

At the time Fannie and Freddie held portfolios of mortgage-backed financial assets of about $700 billion (each!) GSE reformers were afraid that these large hedge funds within the firms were carrying too much risk and had little to do with the core mission for which Fannie and Freddie were created. Because Fannie and Freddie (a) were so big, (b) held such huge portfolios with poorly-understood risk; and (c) were interconnected with so many other financial firms large and small, reformers feared they posed too much risk to the financial system.

The House Financial Services Committee reported a bill to strengthen the GSE regulatory agency (and to rename it as FHFA). The bill reported by committee would have given the new strengthened FHFA head the authority to limit the GSEs’ portfolios. He would be required to consider “any potential risks posed by the nature of the portfolio holdings.” This language is critical because it includes any risks posed by the portfolios to the rest of the financial system.

The Neugebauer-Bean amendment simply inserted three words.  The regulator would be required to consider:

any potential risks to the enterprises posed by the nature of the holdings.

Before Neugebauer-Bean passed, the regulator would have been required to consider the risks these two firms’ multi-hundred billion dollar portfolios posed to the financial system. After it passed, he had to consider only whether these portfolios caused risks to the firms. A weak or captured regulator could, if he wanted, ignore the risks posed to the global financial system by $1.4 trillion of housing finance assets held by these two firms.

I continue to hold the view prevalent at the time, that the Neugebauer-Bean amendment was offered at the behest of those two firms, which were engaged in a decades-long campaign to weaken the authority of their regulator.

This amendment passed the House on a huge vote: 383-36. Blame here is solidly bipartisan: House Democrats voted 221-3 in favor, and House Republicans voted 162-33 in favor. Such was the pre-collapse political power of Fannie Mae and Freddie Mac. Kudos to the 36 brave members who stood up to Fannie and Freddie and voted for strong regulatory oversight. These members cast an unpopular vote that was later borne out by the facts.

There are few floor votes that can be linked directly to the financial crisis. Members who voted aye on Neugebauer-Bean contributed to the crisis, members who voted no deserve credit for trying to limit this one contributing factor to systemic risk. Along with most of his colleagues, Mr. Watt voted aye, to weaken the authority of the regulatory position for which he will now be nominated.

We know how this movie ends. Fannie and Freddie collapsed and were placed into conservatorship by then-FHFA Director James Lockhart in September 2008. These two firms were the first dominos to fall that month.

No member of Congress who voted in May 2007 with Fannie and Freddie and against a stronger FHFA regulator should head that agency now. That includes Mr. Watt.

I am not one of those who argue that Fannie and Freddie were the sole cause of the 2008 crisis, or even the most important cause. They were, however, contributors to that crisis in many ways. The man the President wants to lead FHFA voted in May 2007 to weaken that regulatory agency’s responsibility.

By nominating Mr. Watt the President signals a return to the pre-crisis philosophy of regulating housing finance risk.  That is a huge mistake.  Mr. Watt should not be confirmed to head the FHFA.

I teach a class at Stanford Business School titled “Financial Crises in the U.S. and Europe.” During one class session while explaining the events of September 2008, I kept referring to the efforts of the threesome of Hank Paulson, Ben Bernanke, and Tim Geithner, who were joined at the hip in dealing with firm-specific problems as they arose.

One of my students asked “How involved was President Bush with what was going on?” I smiled and responded, “What you really mean is, ‘Was President Bush smart enough to understand what was going on,’ right?”

The class went dead silent. Everyone knew that this was the true meaning of the question. Kudos to that student for asking the hard question and for framing it so politely. I had stripped away that decorum and exposed the raw nerve.

I looked hard at the 60 MBA students and said “President Bush is smarter than almost every one of you.”

More silence.

I could tell they were waiting for me to break the tension, laugh, and admit I was joking.

I did not. A few shifted in their seats, then I launched into a longer answer. While it was a while ago, here is an amalgam of that answer and others I have given in similar contexts.

I am not kidding. You are quite an intelligent group. Don’t take it personally, but President Bush is smarter than almost every one of you. Were he a student here today, he would consistently get “HP” (High Pass) grades without having to work hard, and he’d get an “H” (High, the top grade) in any class where he wanted to put in the effort.

For more than six years it was my job to help educate President Bush about complex economic policy issues and to get decisions from him on impossibly hard policy choices. In meetings and in the briefing materials we gave him in advance we covered issues in far more depth than I have been discussing with you this quarter because we needed to do so for him to make decisions.

President Bush is extremely smart by any traditional standard. He’s highly analytical and was incredibly quick to be able to discern the core question he needed to answer. It was occasionally a little embarrassing when he would jump ahead of one of his Cabinet secretaries in a policy discussion and the advisor would struggle to catch up. He would sometimes force us to accelerate through policy presentations because he so quickly grasped what we were presenting.

I use words like briefing and presentation to describe our policy meetings with him, but those are inaccurate. Every meeting was a dialogue, and you had to be ready at all times to be grilled by him and to defend both your analysis and your recommendation. That was scary.

We treat Presidential speeches as if they are written by speechwriters, then handed to the President for delivery. If I could show you one experience from my time working for President Bush, it would be an editing session in the Oval with him and his speechwriters. You think that me cold-calling you is nerve-wracking? Try defending a sentence you inserted into a draft speech, with President Bush pouncing on the slightest weakness in your argument or your word choice.

In addition to his analytical speed, what most impressed me were his memory and his substantive breadth. We would sometimes have to brief him on an issue that we had last discussed with him weeks or even months before. He would remember small facts and arguments from the prior briefing and get impatient with us when we were rehashing things we had told him long ago.

And while my job involved juggling a lot of balls, I only had to worry about economic issues. In addition to all of those, at any given point in time he was making enormous decisions on Iraq and Afghanistan, on hunting al Qaeda and keeping America safe. He was making choices not just on taxes and spending and trade and energy and climate and health care and agriculture and Social Security and Medicare, but also on education and immigration, on crime and justice issues, on environmental policy and social policy and politics. Being able to handle such substantive breadth and depth, on such huge decisions, in parallel, requires not just enormous strength of character but tremendous intellectual power. President Bush has both.

On one particularly thorny policy issue on which his advisors had strong and deep disagreements, over the course of two weeks we (his senior advisors) held a series of three 90-minute meetings with the President. Shortly after the third meeting we asked for his OK to do a fourth. He said, “How about rather than doing another meeting on this, I instead tell you now what each person will say.” He then ran through half a dozen of his advisors by name and precisely detailed each one’s arguments and pointed out their flaws. (Needless to say there was no fourth meeting.)

Every prominent politician has a public caricature, one drawn initially by late-night comedy joke writers and shaped heavily by the press and one’s political opponents. The caricature of President Bush is that of a good ol’ boy from Texas who is principled and tough, but just not that bright.

That caricature was reinforced by several factors:

• The press and his opponents highlighted President Bush’s occasional stumbles when giving a speech. President Obama’s similar verbal miscues are ignored. Ask yourself: if every public statement you made were recorded and all your verbal fumbles were tweeted, how smart would you sound? Do you ever use the wrong word or phrase, or just botch a sentence for no good reason? I know I do.
• President Bush intentionally aimed his public image at average Americans rather than at Cambridge or Upper East Side elites. Mitt Romney’s campaign was predicated on “I am smart enough to fix a broken economy,” while George W. Bush’s campaigns stressed his values, character, and principles rather than boasting about his intellect. He never talked about graduating from Yale and Harvard Business School, and he liked to lower expectations by pretending he was just an average guy. Example: “My National Security Advisor Condi Rice is a Stanford professor, while I’m a C student. And look who’s President. <laughter>”
• There is a bias in much of the mainstream press and commentariat that people from outside of NY-BOS-WAS-CHI-SEA-SF-LA are less intelligent, or at least well educated. Many public commenters harbor an anti-Texas (and anti-Southern, and anti-Midwestern) intellectual bias. They mistakenly treat John Kerry as smarter than George Bush because John Kerry talks like an Ivy League professor while George Bush talks like a Texan.
• President Bush enjoys interacting with the men and women of our armed forces and with elite athletes. He loves to clear brush on his ranch. He loved interacting with the U.S. Olympic Team. He doesn’t windsurf off Nantucket, he rides a 100K mountain bike ride outside of Waco with wounded warriors. He is an intense, competitive athlete and a “guy’s guy.” His hobbies and habits reinforce a caricature of a [dumb] jock, in contrast to cultural sophisticates who enjoy antiquing and opera. This reinforces the other biases against him.

I assume that some who read this will react automatically with disbelief and sarcasm. They think they know that President Bush is unintelligent because, after all, everyone knows that. They will assume that I am wrong, or blinded by loyalty, or lying. They are certain that they are smarter than George Bush.

I ask you simply to consider the possibility that I’m right, that he is smarter than you.

If you can, find someone who has interacted directly with him outside the public spotlight. Ask that person about President Bush’s intellect. I am confident you will hear what I heard dozens of times from CEOs after they met with him: “Gosh, I had no idea he was that smart.”

At a minimum I hope you will test your own assumptions and thinking about our former President. I offer a few questions to help that process.

• Upon what do you base your view of President Bush’s intellect? How much is it shaped by the conventional wisdom about him? How much by verbal miscues highlighted by the press?
• Do you discount your estimate of his intellect because he’s from Texas or because of his accent? Because he’s an athlete and a ranch owner? Because he never advertises that he went to Yale and Harvard?
• This is a hard one, for liberals only. Do you assume that he is unintelligent because he made policy choices with which you disagree? If so, your logic may be backwards. “I disagree with choice X that President Bush made. No intelligent person could conclude X, therefore President Bush is unintelligent.” Might it be possible that an intelligent, thoughtful conservative with different values and priorities than your own might have reached a different conclusion than you?  Do you really think your policy views derive only from your intellect?

And finally, if you base your view of President Bush’s intellect on a public image and caricature shaped by late night comedians, op-ed writers, TV pundits, and Twitter, is that a smart thing for you to do?

(photo: The Bush Center)

Background

At almost any point in time the Senate is technically either debating or voting on a yes or no question. Typical questions the Senate considers look like this:

• Should amendment A by Senator B to bill C be adopted?
• Should the Senate pass bill C?
• Should the Senate consent to the nomination of person D to job E?
• [Now that it has finished F,] Should the Senate next proceed to working on G?

Most questions the Senate considers are debatable. This means that any of 100 Senators, or all of them, can speak about the question for as long as he or she wants.

A few types of questions are non-debatable. As soon as the question is asked, the Senate immediately proceeds to vote on the question. Nominations are debatable questions.

There’s a middle ground as well, used mostly for two types of fiscal policy legislation. The Senate has a fixed amount of total time to debate a budget resolution or a budget reconciliation bill.

How a filibuster works

A filibuster is probably better labeled extended debate. To filibuster a question, there isn’t some formal procedural move you make. You simply get recognized by the presiding officer to speak on a debatable question, start speaking, and don’t stop. You talk, and talk, and talk, and talk. At some point people say, “Hey, he’s filibustering,” but there’s no bright line between a filibuster and a really long floor speech. As a procedural matter they are identical.

There are a few interesting technical limitations once you have been recognized to speak. These apply at any time you are recognized to speak on the Senate floor but are particularly important during extended debate.

• You can’t sit down. If you do, you have yielded the floor and the Chair will recognize someone else to speak.
• You can’t eat on the Senate floor. You can drink water or milk, nothing else.
• You can’t leave the Senate floor, even for a bathroom break. If you do you have yielded the floor and the Chair will recognize someone else to speak.
• You don’t have to discuss the pending question. You can talk about anything you want. You can read a book aloud if you like.
• You can only speak once on any particular question.

These limits create some practical limitations on how long a single Senator can filibuster a particular question. At some point you’ll get tired of talking continuously and need a momentary break. If you’re talking a lot you’ll drink something, and that will at some later point provoke a need for a bathroom break.

You can solve the first problem by yielding for a question. Here’s an example which I saw Senators Paul and Cruz implement last night. Note that the “question” itself is substantively irrelevant. The procedural point is to allow someone else to speak for a while while technically maintaining control of the floor.

Sen. A: <discusses the question of the Brennan nomination for a couple of hours>

Sen. B: <interrupting> Will the Senator yield for a question?

Sen. A:  I yield for a question from my good friend Senator B.

Sen. B:  Is the Senator aware that … <talks for an hour or three while Senator A stretches, walks around a bit, and enjoys not speaking, all the while remaining standing and on the Senate floor>

Sen. A:  No, Senator B, I wasn’t aware of that, but thank you for asking. <continues discussing the question for a few more hours>

Through this “friendly yielding for a question” a single Senator can continue his filibuster for quite a long time while his or her allies are doing the speaking for much of that time. Other Senators C, D, and E could additionally play the role that Sen. B plays above.

In addition, at some point Senator A may tire and yield the floor, probably for a bathroom break if nothing else. At that point any other Senator could seek recognition and begin his own period of extended debate. Therefore, if you have a group of Senators teaming up, you can keep a filibuster going for a quite a long while.

Cloture: stopping a filibuster

There are two ways to limit debate: in advance by unanimous consent and while it’s occurring by invoking cloture. If neither of these occurs a question can be debated for as long as Senators are willing to speak.

A unanimous consent (UC) agreement to limit debate looks like this:

Majority Leader: Mr. President [of the Senate], I ask for unanimous consent that debate on this amendment be limited to two hours, with one hour under control of the committee chairman Senator X and one hour under the control of the committee’s ranking member Senator Y.

Presiding Officer of the Senate: Is there objection?  <pauses to allow any Senator to object> Hearing no objection, it is so ordered.

Any single Senator can block a UC request to limit debate simply by standing when the UC request is made and saying the two most powerful words in Senate procedure: “I object.” In doing so she ensures that she and her colleagues can engage in extended debate until and unless the Senate invokes cloture.

Let’s say a group of Senators have been debating a question for a couple of days straight and show no signs of letting up. The Senate majority leader says to himself, “That’s it, we need to shut down this filibuster and bring this debate to a close.” He then finds 15 other Senators to join him in filing with the Senate clerk a cloture motion to limit further debate on this question.

If they do this today, the cloture vote will “pop up” automatically the day after tomorrow, one hour after the Senate begins business for the day. The extended debate will be automatically interrupted for the cloture vote. If at least three-fifths (60) Senators vote to “invoke cloture,” then further debate on that question is automatically limited to 30 additional hours, then followed by a vote on the question. If cloture is invoked, those involved in the filibuster usually fold after a few additional hours, not burning all of their allowed 30 hours of post-cloture time since they know that they can no longer infinitely delay a vote on the question.

The power to invoke cloture and shut down extended debate is a big deal, but the cloture process is cumbersome for two reasons. First, it’s still quite slow. Even if the cloture vote is successful, the Senate will burn 2-3 additional days of floor time on the filibustered question. Second, the majority leader must find an affirmative 60 aye votes (rather than requiring the minority to produce 41 or more votes against cloture), so the majority leader has to make sure everyone he needs to vote aye will actually show up and vote. This last factor helps explain why filibusters are so rare.

Why filibuster when you can just threaten to filibuster?

Let’s say you’re a Senator who really, really, really hates a particular amendment to a bill the Senate is now considering. You approach the bill manager, a committee chairman, and threaten to filibuster the amendment.

You: Mr. Chairman, I hate this amendment and intend to debate it indefinitely. I have several colleagues who have promised they will assist me in this task. I know you support the amendment, but I’m guessing it’s not as important to you as the underlying bill that you wrote. I support your bill, but if this amendment is adopted I’ll have to filibuster the underlying bill as well.

Chairman: I appreciate that, but the amendment sponsor is a close ally of mine. I’m sorry, I can’t help you. And I’m fairly confident that I can get 60 votes to invoke cloture and shut down your filibuster.

You: Yes, but that will cost you two, maybe three days. And I’ll slow you down at every stage of the process. You’re under pressure from the majority leader to finish this bill soon, and you have plenty of other Senators who want to offer other amendments. If you force me to, my colleagues and I will slow the process down enough so that the leader will tell you he’s pulling your bill to move onto other legislation, because it will be clear you’re not going to get the bill passed in the next few days given my filibuster.

Chairman: OK, I believe that you’re serious in your threat. I’ll tell the amendment sponsor I want him to drop his amendment or else I’ll be forced to oppose it to protect my bill from your threatened filibuster.

Note that you never had to filibuster the amendment. You just had to threaten to filibuster it. Maybe the Chairman asked for UC to limit debate, knowing that you would object, so he could demonstrate to his ally the amendment sponsor that you were serious in your threat. By simply threatening to filibuster the amendment and slow down the bill, you achieved the same objective as if you had actually filibustered it.

The simplest reason why there are so few filibusters is that it’s almost never necessary to filibuster a question to block something you hate. You simply have to threaten to filibuster and maybe object to a UC or two. Then the majority leader and/or chairman managing the bill or nomination usually fold to your demand or at least negotiate a compromise with you.

Why doesn’t the majority force a Senator to carry out his filibuster threat?

Your exchange might instead have ended like this.

Chairman: Sure, you can slow me down, but filibustering is hard work. You can slow things down, but to do so you and your friends will need to stand on the Senate floor for the next two days, day and night, talking the whole time. You have other things to do and some of your colleagues are quite old and need their sleep. And frankly I’m sick of you threatening every bill I bring to the floor, so this time I’m calling your bluff. Maybe you can slow down my bill and maybe the majority leader will pull it from consideration because it’s taking too long. But I’ll bet you and your colleagues tire and end your extended debate tonight sometime around 1 AM. I will then be able to continue moving forward with amendments, and we’ll pass this amendment that you hate and I support. I’m filing my cloture motion now. If you want to filibuster, go right ahead. I’ll wait.

In this scenario you and your colleagues could still probably kill the bill by slowing it down for at least a few days, hoping the majority leader will move on to other items. But doing so would cost you a lot. The temporary hassle of staying overnight isn’t the significant cost, it’s the burden you’d be imposing on your allies who join to help you. All of you will be severely limited in the work you can do on other topics during that time. If every once in a while the majority leader and/or bill managers forced those threatening filibusters to actually stay all day and all night, then threats to filibuster would involve some cost that the bluff would be called. Filibusters would be more frequent and filibuster threats less so. The most fiercely debated questions would be subject to all-night filibusters, and the threats to slow down legislation on smaller questions would be relatively infrequent.

So why doesn’t this ever happen? It turns out there is a procedural reason that imposes much greater costs on the majority when the bluff is called.

Why doesn’t the majority leader ever force those threatening a bill to engage in a real filibuster?

Technically a majority of Senators (51) must be present on the Senate floor to do any business. This is called a quorum.

Since it would be super inconvenient for 51 Senators to have to sit on the floor all day when the Senate is in session, the Senate almost always operates with a presumptive quorum. The Senate simply pretends that a quorum exists and they don’t count noses on the floor. Everyone knows that there are typically only a handful of Senators on the floor at any given moment, but they “presume a quorum is present” so they can keep doing business without inconveniencing all of their colleagues and forcing them to be present on the Senate floor.

The trick is that at any point in time, any Senator can challenge this presumption by “suggesting the absence of a quorum” to the Chair. After a while the Chair will have to initiate a mandatory quorum call, in which the Senate Sergeant of Arms has to find Senators and bring them to the Senate floor. If this fails and at least 51 Senators don’t show up, then the Senate automatically adjourns for the day and convenes the next morning.

This is the key procedural weakness that makes the majority leader hesitant to force Senators to carry out their filibuster threats. Suppose last night Senator Paul and a few of his colleagues had kept their filibuster going until 2 AM. At that point Senate Majority Leader Reid would still be around, as would be Senator Paul. Senator Paul could then suggest the absence of a quorum. There clearly aren’t 51 Senators present, so a mandatory quorum call would soon begin. Most other Republican Senators, who are sympathetic to Sen. Paul’s filibuster but aren’t participating, would be sleeping soundly in their beds and would ignore the mandatory quorum call when the phone rings.

But Leader Reid wants to force Sen. Paul to continue filibustering, so Leader Reid needs to keep the Senate operating in the face of the mandatory quorum call. Leader Reid must therefore get 51 Senators to the Senate floor at 2 AM, and he’s probably limited to working with a universe of 55 Democrats sympathetic to his situation.

If Leader Reid can’t produce 51 Democratic Senators on the floor at 2:15 AM, the Senate adjourns for the night. Senator Paul can get several hours of sleep, freshen up, and begin again.

If Leader Reid succeeds, Senator Paul can wait until the very grumpy Democrats leave, then again suggest the absence of a quorum, maybe at 3 AM. And then again at 3:30 AM, and at 4 AM. He can do the same the next night, since cloture doesn’t “ripen” until after two nights.

Senator Paul only has to inconvenience himself by staying all night, maybe joined by a colleague or two who is equally fervent and committed to the filibuster.

Leader Reid must get 51 Democratic Senators to the floor at any time of night (or day) that Senator Paul feels like initiating a quorum call, and as many times as Senator Paul would like. Calling Senator Paul’s bluff of a threatened filibuster means Leader Reid must inconvenience his entire caucus, probably forcing them to sleep on cots in the Capitol building for two nights in a row.

Senators are powerful, independent types. Their average age is around 60. If you’re the majority leader and you’re trying to break a filibuster on a major piece of legislation that is a top national or your party’s top priority, then you can probably persuade 50 of them to foul up their schedules and to join you in sleeping in the Capitol for a couple of nights. But you can’t do this too often, and if you’re asking them to do so on a relatively minor amendment or bill, some of them are going to say no.

The majority leader and his bill managers usually yield to credible filibuster threats because they assess that they cannot rally enough of their colleagues to bear the personal and schedule costs of breaking the filibuster, or because the long-run cost of asking them to do so on this particular issue is significantly higher than the cost of yielding to the demand or negotiating a compromise.

Congratulations to Senator Paul and his colleagues for reviving the old-school filibuster.

Let’s review:

• The sequester is modeled after a similar provision in law from more than 20 years ago.  That earlier sequester exempted certain programs from spending cuts, most notably Social Security, and it limited any Medicare cut to at most 2% 4%. These are the two largest entitlement programs in the federal budget.
• When the terms of this sequester were negotiated in the summer of 2011, the President’s advisors expanded the list of programs exempt from spending cuts to include most low-income/safety net entitlement programs. Most notable here is the exemption of Medicaid, the third largest entitlement. They also limited the Medicare cut to no more than 2%.
• In the summer of 2011 President Obama wanted the sequester to raise taxes as well but Congressional Republicans refused. For the past few months the President has been trying to rewrite the terms of that deal so that tax increases will be substituted for spending cuts, at least for the first year. His insistence has contributed to a stalemate.
• The sequester is now cutting spending in FY13 by the following percentages:
  • defense discretionary:  7.8% cut;
  • domestic discretionary:  5.0% cut;
  • Medicare:  2.0% cut;
  • small pots of defense and domestic mandatory spending are cut by almost the same percentages as their discretionary counterparts above.

tsaLet’s do a thought experiment: suppose the sequester now taking effect was instead structured as a true across-the-board spending cut?  Suppose we wanted to cut government spending this year by the same $85 B as is being cut now, but we didn’t exempt huge swaths of entitlement spending?  And suppose we cut all spending by the same percentage?

The discretionary programs now being cut by the sequester would take smaller hits. Let’s see how the numbers change.

In my hypothetical across-the-board spending cut I will exempt only interest payments and defense spending in a combat theater. Everything else, including all non-combat theater defense and the three largest entitlements of Social Security, Medicare, and Medicaid is on the cutting block along with all other non-interest, non-combat spending. And I’m going to cut everything by the same percentage rather than having a higher percentage cut for defense and a lower percentage cut for Medicare.

My arithmetic shows that such a true across-the-board spending cut would save the same $85 B this year through a 2.6% cut to all spending except interest and defense spending in a combat theater.

A true across-the-board spending cut would therefore be about one-third as deep of a cut in defense spending as the current sequester, and about half as deep of a cut in nondefense discretionary spending as the current sequester.

Seniors wouldn’t like a 2.6% cut in their Social Security checks, and the poor wouldn’t like the same percentage cut in Medicaid, cash welfare, food stamps, and other low-income support programs. Medical providers and health insurers wouldn’t like the larger cuts in Medicare and the inclusion of Medicaid and CHIP in the cuts.

But there would be upsides for other things the federal government does relative to where we are now. Let’s look at the effect of this alternative on spending this year for some popular programs relative to the effect of the sequester now in place. If we substituted a true 2.6% across-the-board spending cut for our current sequester, this year the federal government would spend:

• $300M more for Special Education;
• $732M more for medical research at the National Institutes of Health, $138M more for National Science Foundation grants, and $424M more for NASA;
• $124M more for the Food & Drug Administration and food safety;
• $131M more for airport security, $110M more for the FAA, and $23M more for air marshals;
• $333M more for the FBI;
• $139M more for immigration and customs enforcement and $242M more for customs and border protection;
• $53M more to operate the National Parks and $141M more for the Forest Service;
• $24M more for the Smithsonian;
• $54M more for child are and development block grants, and $238M more for children and families services programs;
• $195M more for global health programs;
• $142M more for the Coast Guard;
• and about $27B more for defense.

By insisting that the deficit reduction debate is a choice between cutting spending and raising taxes the President has frozen Washington in a stalemate position that is likely to last for the remainder of his term. If policymakers were instead to set the tax stalemate aside and examine more closely the choices they are implicitly making within the universe of government spending, they would see that by exempting huge swaths of popular entitlement spending from any cuts they are focusing the pain on programs that to many are more important and more popular.

Our federal budget process is fouled up in that it gives procedural advantages to entitlement spending over discretionary spending.  Benefit programs that primarily help particular individuals are advantaged, while programs that principally provide for the common good are disadvantaged.  The current sequester exacerbates those procedural advantages and, as a result, means that many broadly-supported functions of government are being cut even more that they would be if the spending cuts were distributed evenly across all government spending.

(photo credit: Anita Ritenour)

THE PRESIDENT: So economists are estimating that as a consequence of this sequester, that we could see growth cut by over one-half of 1 percent.  It will cost about 750,000 jobs at a time when we should be growing jobs more quickly.  So every time that we get a piece of economic news, over the next month, next two months, next six months, as long as the sequester is in place, we’ll know that that economic news could have been better if Congress had not failed to act.

And let’s be clear.  None of this is necessary.  It’s happening because of a choice that Republicans in Congress have made.  They’ve allowed these cuts to happen because they refuse to budge on closing a single wasteful loophole to help reduce the deficit.  As recently as yesterday, they decided to protect special interest tax breaks for the well-off and well-connected, and they think that that’s apparently more important than protecting our military or middle-class families from the pain of these cuts.

The President’s initial attempt to blame Republicans in Congress for current and future economic weakness is flawed because House Republicans passed a bill that would have the same macroeconomic effect as the President’s proposal, at least for this year.

CBO estimates the sequester will knock about 0.6 percentage points off the growth rate of GDP in calendar year 2013, and therefore that undoing the sequester (in 2013) would increase GDP growth by the same amount. For the moment I’ll set aside the concerns often expressed on the right about estimating the GDP effects of fiscal expansion or contraction and take CBO’s estimates as given.

The key flaw in the President’s argument is that the first year effects of the House-passed sequester replacement bill and the Senate Democrats’ failed bill are nearly identical.  Each would unwind almost all of the 2013 effects of the sequester, and each would therefore increase GDP growth by the same amount.

The proposals differ in the amount and composition of their deficit-reducing offsets, but in both proposals those would be spread out over a long timeframe beginning next year.  Senate Democrats proposed to offset in future years all of the $85 B they would spend this year, while House Republicans passed a bill that would reduce the deficit even more in future years. But $8 B (Senate Democrats) to $20 B (House Republicans) of deficit reduction for each of the nine years after this one is too small to show up in any estimate of macroeconomic effects. The competing proposals would have the same growth benefit this year, and similar and trivially small growth costs in future years, beginning in 2014.

The President says there wasn’t a deal because Republicans refused to accept his proposed offsets. House Republicans can make exactly the same argument. This 0.6 percentage point growth drag is because the two sides couldn’t agree, not because one party wanted to fix the problem and the other party didn’t.

I expect the President will fail to mention that CBO also says that the tax increases he championed and got will slow this year’s economic growth by an additional 0.6 percentage points this year on top of the effects of the sequester.