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Their steps may work — and I have some sympathy for German taxpayers, who have adopted some of the tough work and pension rules now being demanded of the Greeks, and who have paid their taxes, unlike the Greeks. But there is a real chance that Europe’s troubles will drag the U.S. economy further down, and lots of official and unofficial forecasts are turning more pessimistic about the outlook for 2012.
What to do? In the short run, we in the United States clearly need more of a jump-start — or at least not more bleeding. JPMorgan says that if Congress does not extend the payroll tax cuts and unemployment benefits that expire at the end of the year, we could lose 1.5 points to 2 points in growth next year, which would be terrible. Continuing current policy and adding in an infrastructure bank are obvious steps, ones that should be part of a super committee package.
The rest of the package has been outlined repeatedly over the past two years by every bipartisan group that has tackled our debt problem: a total of $4 trillion in debt reduction over 10 years, with somewhere from $1.3 trillion to $2 trillion of it coming from revenues; tax reform that reduces marginal rates and broadens the base without losing progressivity; and serious efforts to bend the cost curve in Medicare and Social Security, along with reform in Medicaid. There are different ways to achieve the goals, but the template is repeated consistently, whether it is through the Simpson-Bowles commission, the Rivlin-Domenici commission or the Senate’s “gang of six.”
Of course, the super committee should have cut to the chase as soon as it was created, embracing the template and debating the specifics of how to achieve the goal. But the Republican refusal for crucial months to entertain any revenue increases made the task much harder. It meant that Democrats who made clear that they would accept tough changes in Medicare were not going to negotiate specifics on entitlements without a commitment on tax increases.
Now, at least some revenues are on the table (although the proposal by Pennsylvania Republican Sen. Pat Toomey including a few hundred billion dollars in revenues in return for a commitment to add $4 trillion to the debt by making the Bush tax cuts all permanent was, to put it charitably, not serious).
But to pull a plan together in eight days is much harder — although far from impossible. Even a major deal that includes $1 trillion or so in tax hikes without the specifics of how to get there, but with a date certain for the tax committees to reach a plan, would be OK. So would including costs from winding down the war, as a bit of grease on the skids to reach the larger deal.
The other options — a weak plan to cut $1.2 trillion, much of it not real, or a weaker plan to cut something, but less than $1.2 trillion, or super committee failure paired with a limited likelihood that the resulting sequester would be implemented — will be disastrous.
It would probably trigger another downgrade of U.S. debt and be so deflating to Americans and non-Americans that it would hasten the prospect of a truly serious downturn. Those options ought to be unthinkable. They are real.