Debt Ceiling Negotiations: Politics or Pragmatism?

Charles Krauthammer delivers a must read piece today on the budget, the debt-ceiling and Obama: The Elmendorf Rule

But the Republican House did do its homework. It’s called a budget. It passed the House on April 15. The Democratic Senate has produced no budget. Not just this year, but for two years running. As for the schoolmaster in chief, he produced two 2012 budget facsimiles: The first (February) was a farce and the second (April) was empty, dismissed by the CBO as nothing but words untethered to real numbers.

Obama has run disastrous annual deficits of around $1.5 trillion while insisting for months on a “clean” debt-ceiling increase, i.e., with no budget cuts at all. Yet suddenly he now rises to champion major long-term debt reduction, scorning any suggestions of a short-term debt-limit deal as can-kicking.

The flip-flop is transparently political. A short-term deal means another debt-ceiling fight before Election Day, a debate that would put Obama on the defensive and distract from the Mediscare campaign to which the Democrats are clinging to save them in 2012.

Indeed – I personally find it hard to believe that after skipping meetings with his own deficit reduction commission and then ignoring their recommendations that suddenly President Obama is quite serious about meaningful, long-term reform. While this may be posturing for 2012, the need for reform is real, as the San Francisco Gate reports:

President Barack Obama and lawmakers, searching for ways to reduce the deficit, are discussing using an alternative yardstick for gauging inflation to calculate annual cost-of- living adjustments for millions of Americans, according to congressional aides.

The idea of switching to the “chained consumer price index” has been endorsed by economists, who say the current inflation measure exaggerates how much prices increase. Yet it’s unpopular with many lawmakers because it could mean cutting Social Security by $112 billion over 10 years while increasing taxes by $60 billion, according to estimates by the Congressional Budget Office and the Joint Committee

Social Security and other government benefits, as well as much of the tax code, are automatically adjusted for inflation so Americans don’t fall behind as prices rise. Economists say the government’s inflation measure overstates how quickly prices increase, which means it’s paying too much for annual cost-of- living gains while collecting too little tax revenue. Advocates say the chained CPI measure would be a more accurate gauge.

Inflation is a general rise in the price of goods and services, and the government measures it by surveying thousands of Americans on what they buy and where they shop.

The Bureau of Labor Statistics each month sends 400 price collectors to 26,000 locations in 87 cities to record the prices of breakfast cereal, bus tickets, haircuts, toys, funerals, dental fillings, jewelry and 80,000 other products and services. It uses that information to devise a basket of goods the typical family buys each month in order to track prices.

There is a “pretty widely held” consensus among economists that the bureau’s methodology exaggerates inflation because it doesn’t fully account for the way individuals respond to rising prices, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

It accounts for those who buy cheaper varieties of wine or steak when those prices rise, though not for those who opt instead for beer or chicken. That means it overestimates inflation, which leads to cost-of-living increases for Social Security beneficiaries, veterans and federal retirees that are bigger than necessary to maintain their purchasing power. It also affects the number of Americans who qualify for food stamps and other aid with eligibility criteria tied to federal poverty guidelines.

In addition, it means that the thresholds at which higher income tax rates begin to apply to individual taxpayers rise faster than necessary to prevent so-called “bracket creep,” which means less tax revenue pouring into the Treasury.

The chained index accounts for the belt-tightening chicken eaters and beer drinkers. Over the past decade, the alternative index has grown more slowly than the current inflation measure by an average 0.3 percentage points a year, the CBO says.

“It’s a no-brainer,” said Marc Goldwein, former associate director of the administration’s deficit commission. “We’re measuring inflation wrong now, and it’s obvious we should measure it right — especially if it’s going to reduce the deficit.”

It’s possible the President is sincere in proposing this reform but perhaps if the President had worked with his deficit commission and Congress sooner, we’d already have a long-term, non-can-kicking solution for America and Congress could move forward with the rest of the nation’s business. But the President’s lack of leadership has instead led to more partisan bickering and political games at a time when the country can least afford it.

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