Innovation

Recent reports indicate that the budget/debt negotiations will not produce a “grand bargain.” At best they will produce a smaller set of targeted reforms slightly improving but not correcting the unsustainable trajectory of federal finances. But whether the budget discussions produce a big deal or a small one, however, both sides would do well to implement a more accurate measure of economy-wide inflation, namely the “chained” C-CPI-U.

The Dodd-Frank bill failed to address the key issues of prudential regulation that sparked the crisis. Instead, the FDIC was granted unlimited bailout capacity moving forward. Policymakers need to fundamentally rethink the value of regulatory capital ratios and discretionary bank interventions. Market-based metrics of bank performance that guide the recapitalization process may provide a far more robust and durable mechanism for preventing and handing future financial crises.

In this year’s budget submission, the Obama Administration included a proposal to partially reform the finances of the Pension Benefit Guaranty Corporation (PBGC). In essence, the proposal would give PBGC increased authority to modify both the level and structure of premiums that pension sponsors are charged for pension insurance. The basic conception of the Administration proposal is sound and its enactment would strengthen the insurance system standing behind worker pension benefits.

Yesterday’s release of the draft Ryan budget offers a vision for repairing the federal budget. Thus far, this vision for fiscal repair remains the only serious legislative alternative to fiscal catastrophe. President Obama’s submitted budget, by contrast, contains no significant effort to repair the federal fiscal outlook. The Congressional Budget Office (CBO) has shown that it would leave federal finances on a clearly unsustainable trajectory. Health care reform, long touted by some as being the real key to fiscal reform, turned out to mean expanding federally-subsidized coverage rather than fiscal correction. Last year the Congressional Democratic leadership declined even to pass a budget at all. If there is a responsible left-of-center alternative to the Ryan proposal, we have yet to learn what it is.