Despite its recent battering in the public and Congressional opinion polls, the Fed remains the single most important economic policy body in the United States, and perhaps the world.  Its innovative and aggressive response to the financial crisis is the single most important reason that the panic was as short-lived as it was, and that the economic fallout was not far worse.  Forget the TARP. Forget the stimulus.  Never forget the Fed.

The Bush Administration experience is illustrative.  Nobody – regardless of the merits – has accused George W. Bush of excessive economic literacy.  Neither has his Administration been considered either economically innovative or especially successful.  But then-President Bush appointed to the Fed the current Chairman of the Board of Governors, Ben Bernanke, and the current Vice-Chairman, Donald Kohn.  Both were first-rate picks that featured leading expertise in monetary policy and the economics of financial crises (Bernanke) and an unparalleled portfolio of experience in and about the Fed (Kohn).  Bush’s discipline to push aside other considerations and choose top-quality Governors is a tribute.

The public should hope for the same from President Obama.  But there are reasons to be concerned.  The Administration out-sourced the stimulus package to Congress, resulting in a bloated bill that flunked the traditional test of timely, targeted and temporary in favor of permanent, partisan, and pork-barrel.  Will he again put aside principle in favor of somebody else’s preferred Fed pick?

In healthcare, the President opted to focus on the wrong issue – expanding coverage – at the expense of solving the real problem of higher costs.  Will he make the same mistake and fail to recognize the top challenge for the Fed is to exit its extraordinary interventions without re-igniting inflation?  The handwriting is on the wall.  The U.S. will face a prolonged period of painful unemployment.  Will he also single-handedly revive the Carter-era misery index by stacking the Board of Governors with inflation doves?

Finally, the President must address this as a management issue.  His (and every) economic team is populated with ambitious, upwardly-mobile types who want to either be the next pick or prevail for a favored friend.  He needs to impose a vetting regime that favors experience, expertise, and excellence.

Over the next few weeks, the names of potential Fed picks will begin to circulate.  The quality of these picks will be a central test of the seriousness of the Administration.

If relevance to the lives of people is a metric for Man of the Year, Ben was off the scale.

It worked.  The financial panic subsided, financial markets have begun to heal, evidence continues to mount that growth is returning in the United States and elsewhere.

If success is a metric for Man of the Year, Ben was off the scale.

Ben, the Fed and his colleagues in the U.S. and abroad literally made it up as they went.  New programs were invented, some were discarded, and others expanded.  The Fed quickly shifted from reactive fire-fighting to laying a foundation for financial markets.  They moved from institution-specific policies (Bear Stearns, AIG, etc.) to supporting markets (commercial paper, mortgage-backed securities, etc.) that were crucial elements of the financial circulatory system of a healthy economy.

If creativity and ingenuity is a metric for Man of the Year, Ben was off the scale.

And the public and Congress don’t really understand what happened.  Ben has been lambasted for doing exactly what a central bank should do in a crisis – anything and everything to restore calm.  The Fed’s independence is under attack; Ben’s qualifications are being questioned.

If mystery and controversy is a metric for Man of the Year, Ben was off the scale.

Think about it, a decade ago Fed Chairman Alan Greenspan shared the cover of Time with Robert Rubin and Larry Summers because the so-called Committee to Save the World had run off a modest problem with the peso.  Ben Bernanke ran off a major problem for the world.  Of course he should be Man of the Year.

Besides, he has the same first name as Roethlisberger.

The CBO seemingly blessed a Baucus bill that was kept under the $900 billion line only by the most transparent and dishonest budget trickery.  House Democrats seemingly daily announce that their bill is now under the magic line, even though CBO Director Doug Elmendorf had apparently driven a stake in its heart earlier this year by pointing out that it: (a) cost too much, (b) ran near-term deficits, and (c) failed to “bend the cost curve” and thus added to the country’s entitlement burdens.

What is up with the CBO?  One day they are damning flawed legislation; the next they are embracing its twin.  Is the CBO scoring process simply arbitrary and without foundation? Perhaps so, but let’s first dive a little deeper and give it a fair hearing.

First, it is not the “CBO” scoring process.  The process was originally established (along with the Budget Committees in the House and Senate, and the CBO itself) in the Budget Act of 1974.  It has been tweaked since numerous times, and CBO has had input all along.  But it is far from the case that CBO runs the show.

Instead, the CBO operates wearing a very particular set of handcuffs.  To begin, the law says that the CBO cannot offer policy advice.  It is literally the case that CBO (in general) and Doug Elmendorf (in particular) cannot simply announce “Gee, that _______ bill is a really irresponsible, wrongheaded, bad idea.”  (Fill in ________ with the majority of bills that CBO is asked to analyze.)  In the context of the healthcare reform debate, one pivotal moment came when the CBO Director opined to great fanfare that neither the House tri-committee bill nor the Senate committee bill would bend the cost curve.  What was lost in the uproar was that he did not send out a press release, blog, or book himself on the Sunday shows.  Instead, he was asked point blank by Senate Budget Chairman Kent Conrad.

CBO was used by Senator Conrad to make a point.  Let me come back to that.

More recently, the CBO put out its “score” of the Baucus bill indicating that it cost under $900 billion, reduced the deficit over the next ten years, and did not create a new long-run fiscal imbalance.  This seemed a bit odd (a euphemism for “completely batshit”) since the bill assumed that doctors would be subjected in two years to a cut in their Medicare reimbursements of over 20 percent.  (As we have since seen, dropping this fiction would cost $250 billion, putting the real price tag over $1 trillion.)

It also assumed that future Congresses would steadily reduce Medicare spending to the tune of one-half trillion dollars, something that has never (did I mention never) happened.  Instead, previous attempts of this sort (the 1997 Balanced Budget Act) were quickly reversed.  And you would think that CBO might have mentioned the schizophrenic sleaziness of creating a new, large health entitlement spending program by promising to cut the previous large health entitlement spending program that had never been reined in.  Nope.

You might have looked through the CBO score and noticed that the new entitlement program is projected to grow at 8 percent annually over the long term – exactly the same rate as in the CBO score of the properly-denigrated House bill.  But CBO did not mention that the Baucus bill did not bend the cost curve. What’s up with that?

Finally, you may have been amused that the core of the funding mechanism was set of fees on the medical industry and taxes on “Cadillac” insurance plans that would ultimately impose $400 billion in new costs, roughly 90 percent of which would be borne by those making under $200,000.  These new revenues were projected to grow at over 10 percent annually over the long term.  But CBO said nothing about the base hypocrisy of campaigning for control of the nation’s finances by promising to exempt those making under $250,000 from the cost of their fantasies and then whacking the same people right on the schnozzola.  Not to mention committing to continue to do so at a rate exceeding the wildest projections of their possible wage growth.  CBO did not even footnote the joke.

You may see a pattern developing.  The Senate Finance Committee undertakes political economy malpractice, but the CBO does not mention it.  There is a good reason: It can’t.  The statutes governing the budget process require that CBO compute the budgetary consequences of the written proposal. It cannot judge the intent of the current Congress, the likely actions of a future Congress, or the virtues of the proposals.  Its job is to elucidate the budgetary consequences of the proposal, bill or law as written.

Put simply, if the Senate Finance Committee drafts a budgetary fantasy, CBO will have to score it.  If I had a CBO, I could send it my plan for next year: make $5 million a month and buy a 50-room mansion with a national debt clock on every wall.  I’m sure they would be able to say, “yep, this balances”.  But that doesn’t mean it will happen.  The same is true of the current healthcare reform fantasies.

As a footnote, this explains why CBO takes pains to stress that estimates are “preliminary” until final legislative language is available.  This is not evidence of wimpiness or hedging.  It is evidence of the wisdom garnered over years of living through the mismatch between Congressional intent and the ability of lawmakers to draft statutes that achieve their budgetary dreams.

So the bottom line is this: policy is made by the Congress, not CBO.  If the Baucus score looks at odds with reality, that’s because CBO was used to deliver the score that it did.  Those, particularly responsible Democrats in the Senate, who want a realistic assessment should do what Senator Conrad did.  Ask.

What would the Baucus bill cost if the Medicare “doc fix” is included?  Would it still balance?  What happens if campaign promises must actually mean something and the fees and excise tax go away?  Does it still balance?  Does it bend the cost curve?

There are voices that will argue that the problem is CBO.  They will point to the fact that budget projections don’t always turn out to be right.  They will argue that even if the scores are numerically right, they are economically or politically misleading.  As a former Director, I may be drinking the Kool-Aid, but I think these miss the point.  The CBO is one of many instruments of policy-making in a political environment.  It is the obligation of the elected curators of that process to use CBO to paint a complete picture of the consequences of policies.

It is not, and should not be, in the power of CBO to do so.

The flaws of this policy are almost too numerous to list.  To begin, it represents yet another policy to shift the playing field in favor of owner-occupied housing.  Since the inception of the income tax in 1913, mortgage interest has been deductible.  Over the nearly 100 years since, a bipartisan effort has yielded subsidies to construct low-income housing, loan guarantees, two government-sponsored mortgage giants in Fannie Mae and Freddie Mac, and ceaseless other approaches to raising the fraction of Americans who are homeowners.  Why?  There is not any compelling evidence that owning a home improves citizenship, social cohesion, or any other of its supposed virtues.  And it is certainly the case that shifting scarce capital away from new technologies and into new condos hurts our competitiveness.  Bribing first-time homebuyers is just another chapter in this misguided history.

More recently, the U.S. economy is suffering from the fallout of a housing bubble.  That bubble was built on a foundation of the Federal Reserve’s low-interest rate policy, augmented by sustained efforts to meet goals for low-income and minority homeownership.  In short, on top of everything else, policies were constructed so as to get as many more people – often of the most marginal financial means – to buy homes.  Eventually, these policies backfired as it became apparent that too many people were in homes they could not really afford.

The solution?  Put $8,000 on the table to lure new people into these homes.  Congress is evidently unfamiliar with the notion that repeating the same action and expecting a different result is insanity.

I’m not sure if it is worse if the policy “works” or if it doesn’t, but it likely won’t.  The $8,000 first-time homebuyers tax credit is straight out of the same pool of bad ideas that gave us the misbegotten “cash for clunkers” program.  The latter produced essentially no environmental or energy-security benefits (not too surprising when you could get $3,500 for simply raising your mileage by only four miles-per-gallon) – just as a homeownership push has no real benefits.

Cash for clunkers was a superficial “success” from a sales point of view; we saw all those cars driven off the dealers’ lots powered by taxpayer subsidies.  Similarly, a check from Uncle Sam has sweetened home sales.  But most of the cash for clunkers sales would likely have taken place anyway, albeit later in 2009 or in 2010.  All the program did was steal sales from the future and provide a midsummer bump that will soon fade.  Similarly, more cash for homeowners will not represent real recovery in the housing market; it will just mean that next year and the year after will see less sales.

There are two fundamental problems facing the housing market.  Many mortgage holders cannot afford their terms – it is a mismatch of housing costs and financial capacity.  Many others are in houses that are no longer as valuable as the outstanding balance on their mortgages.  The first group needs better economic prospects.  The latter need mortgages that reflect the fact that their equity is simply gone.

A $8,000 tax credit does nothing for either group, addresses no real problem, and should simply go away.

Congress is now contemplating two bills (HR 1207 and S 604) entitled the “Federal Reserve Transparency Act” which would eliminate prohibitions on having the Government Accountability Office (GAO) audit the Fed.  Despite my admitted biases, I surprised myself by not dismissing these initiatives out of hand.

Specifically, under current law (the Federal Banking Agency Audit Act of 1978) the GAO cannot audit Fed monetary policy functions: (a) transactions with other central banks or governments; (b) “deliberations, decisions, or actions on monetary matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;” and (c) “transactions made under the direction of the Federal Open Market Committee.”  The bills would eliminate these restrictions.

The primary objection that is raised about these bills is that they will impede Fed independence.  Certainly, permitting the GAO to audit the monetary deliberations of the Fed (point (b), above) would impair that independence.  So I think that is going too far.

But independence is not the same thing as unaccountable.  The Fed makes (and loses) profits on its regular trading, and has put a tremendous amount of resource at risk in response to the financial crisis.  It seems to me that there should be no objection to a clear, audited accounting of its transactions.  Having the GAO perform such an audit strikes me as simply good governance.

One potential objection is that these audits might inadvertently disclose the data of private financial firms in ways that are harmful.  For example, the Fed has traditionally not disclosed who is borrowing from its discount window so as not to start a “run” on these institutions.  In the course of audits, the GAO would necessarily come across the information on these kinds of transactions.  But doing the audit does not mean that there must be public disclosure of these data.  GAO could conduct its audit and brief Congressional overseers in closed session.

It may be that the idea of a Fed audit is being driven solely by frustration over the financial crisis and the extraordinary range of government intervention.  It may require fine-tuning so as not to harm the conduct of monetary policy.  But is should not be dismissed out of hand.

It was so important that the government kept it in a firm grip.  Everyone paid the same price; well almost – businesses negotiated a lower rate.  Service quality was strictly mandated to ensure fairness – everyone got the same service on the same days for the same price.  And over time, everybody came to despise the U.S. mail.

The massive inefficiencies of mandated services and fixed prices led to bad service and choked-off promise.  Of course, it also provided a wide-open opportunity for new entrants in business package and overnight delivery.  A sophisticated pricing system for size, weight, delicacy, and timeliness delivered strong competition for residential dollars.  Eventually, the government was forced to relinquish the iron controls and allow flexibility in pricing and service to businesses and households.  The mandated 6-day delivery schedule to every doorstep survives only through a government-provided monopoly on first class mail.

Sound familiar?  If so, then look out.  The Federal Communications Commission seems to have the same design for the internet.  Despite no evidence of any real problem, it is set to impose “network neutrality” – whose key features are mandated one-size-fits-all service and prices.  Almost certainly, this approach will lead to inefficiencies and a diminished internet.  Texas Senator Kay Bailey Hutchison is right to lead the charge against this policy error.

This is an important problem because the key to the future will be delivering more network capacity.  Entrepreneurs will need a robust network to deliver new content to global consumers.  The demand for network capacity (bandwidth) is increasing sharply.

The impact will be widespread.  If network upgrades match capacity with digital innovation, perpetual Schumpeterian competition in a U.S.-based entrepreneurial class will build a comparative advantage in the knowledge economy to continuously penetrate new markets, identify new market niches, and deliver innovative products to global consumers.  U.S. manufacturers of information technology products will build on their existing technical superiority to churn out a steady supply of hardware, underpinning consumers and digital entrepreneurs.  This robust manufacturing sector works hand-in-hand with a robust pool of nearby research and development that, in turn, generates an ongoing stream of new intellectual property and propels an aspiration for education in the United States and international mobility for the elite abroad.

But if there is no incentive for network upgrades the global market for innovative digital products suddenly starts to look like a bricks and mortar business model.  Network congestion or security limitations raise the “transport costs” for U.S. entrepreneurs trying to reach customer markets.  To compete, they must shift their “factories” abroad to be closer to profitable markets.  To remain flexible, they begin to work more closely with hardware sources in these locations, which become alternative magnets for research and development budgets, innovating engineers, and intellectual property advances.  In short, just as with the mail, others will seize the opportunity.  But they will not be in the United States.

Some observers express concern over the potential market power of telecommunications and cable companies.  With their existing connections to residential homes, the traditional players are portrayed as a threat to competition.  This is a sensible view of history and there is room for debate on the present.  But the recent experience of market expansion evidenced by the rapid rise of satellite and wireless communications and rapid technical advances such as the expanding capacity of a single copper wire, suggest that the market that matters – the market five or ten years from now – will be fiercely competitive.  And given a choice between regulators and the market, it is better to bet on the market.

Market forces – appropriately policed for abusive monopoly practices – can handle the pricing and delivery for an enormous variety of content providers to consumer market niches.

I do not think that Republicans should adopt a policy of universal health insurance.  It is obvious, I hope, that health insurance is an important product and that the current markets for health insurance leave a lot to be desired.  Republicans should be foursquare in favor of major reforms.

But there are two very large problems with the idea of universal coverage. The first is conceptual – what does “universal” mean? But the second is more important. However defined, universal coverage is an outcome.  The only way to guarantee an outcome is to be willing to utilize the coercive power of the government to achieve it.  Republicans should not endorse this way of thinking.

Conservatives have correctly focused on creating opportunity, and have been guided by the notion that fairness is a concept richer than equality. Those principles should guide the health insurance debate as well. Republicans should favor reforms that eliminate unfair and preferential treatment of some (those who get insurance from their employer) over others (the rest).  They should be in favor of market reforms that engender competition regardless of health status. But they should stay out of the business of coercion and excessive government guarantees.

To read other contributions to this symposium, click here.

It has been amazing to watch the evolution of the healthcare debate – including the brazen willingness of Congress to push forward with a price tag over $1 trillion.  (Aren’t these the same legislators who are up in arms over the $700 billion TARP?)  Even worse the bills are riddled with gimmicks that disguise the reality of a much higher price tag.  Consider, for the moment, the proposed Community Living Assistance Services and Supports (CLASS) Act that is embedded in the reform.

Now, let me stipulate at the outset that long-term care (LTC) costs are a serious issue. Nearly 20 percent of seniors are subject to chronic impairment, a rate that rises to 55 percent among the oldest of the old (those 85 years of age and older).   The financial reflection of these physical needs was the spending of $135 billion in 2004, or roughly $15,000 per senior in need of LTC. Even more striking is that even among the severely impaired, a majority receive care only from “donated services”; i.e., care from friends or family members such as a spouse or child.

Who picks up this bill? In the private sector: (1) donated services – the private, non-market service provision and financing; (2) out-of-pocket payments (private, self-insurance); and (3) private LTC insurance under $1,000 a senior. Government spending is quite substantial with Medicaid providing $5,500 and Medicare $4,000 per senior.

The LTC problem will get harder, not easier. First, the demand for LTC services will rise along with the demographic shift in the United States.  Second, the suppliers of those donated services – largely spouses and daughters – will be working and less able to provide these LTC services.  One solution would be to foster private sector solutions through flexible regulations that focus on outcomes – appropriate care, improvements in impairment, etc.

The most important thing is that the financing of the costs of future LTC services be met by “pre-funding” – accumulating in advance the funds needed to pay these bills. Why is pre-funding important?  From the perspective of insurance, pre-funding allows for greater sharing of risks.  Costs are distributed not only over a group of people – perhaps only the senior himself or herself, but perhaps also the family, friends and informal network – but over a large number of years.  By spreading risks more broadly, the costs of LTC place a smaller demand on the overall annual lifestyles of those paying the bills.

From the perspective of the overall economy, pre-funding serves to raise national saving.  Each additional dollar of national saving provides another dollar that can be devoted to investing in equipment, structures, education and labor skills, or innovation and other technologies.  These types of investments are the foundation of economic growth, and that growth is ultimately the source of better standards of living for seniors and workers alike.

Finally, the costs of greater LTC spending could be financed by private LTC insurance policies.  Because private insurers accumulate and hold financial reserves against the costs of LTC services claims, this approach provides pre-funding of LTC costs.   At the same time, widespread use of LTC insurance would spread risks broadly across the population – in exchange for premium payments, elders would spread the costs to shareholders, debt holders, and financial market participants across the society.

Unfortunately, the CLASS Act goes exactly the wrong direction. In return for a monthly premium that begins at $65, the CLASS Act provides a daily cash benefit averaging just $50. (Meanwhile a 2009 survey of long term care costs found the current average daily cost of a private nursing home room in the United States is approximately $203.)

The responsibility to keep the CLASS Act entitlement afloat falls to the Secretary of Health and Human Services, who would have to raise the payroll tax rate. The Congressional Budget Office, American Academy of Actuaries and the Society of Actuaries all agree that the initial monthly payroll tax would need to be set between $110 and $160.

Where does that leave us?  The CLASS Act would create a new government entitlement.  Worse, this proposed program is not financially viable. It would continue the pay-as-you-go tradition and would not generate pre-funding that is so economically important.  Unfortunately, a budget gimmick collects the payroll taxes before it starts paying benefits, so its advocates are hiding behind an illusion of fiscal solvency.  No one should be fooled.

Let’s look at the record.  By now, everyone is familiar with the track record on the stimulus legislation.  It was done fast, and poorly.  Global warming legislation was on a similar track, having been rammed through the House even though Republicans were not granted the ability to even see a complete copy of the final bill before the floor vote.  Fortunately, the Senate has laid down the law and there will be no forced march before August.

On health care reform, the House Committee on Ways and Means markup went until the wee hours of the morning.  The House Education and Labor markup went until dawn last Friday.  In the aftermath, the Congressional Budget Office rushed out their estimate of the bill on Friday night about 9 pm.  The only catch was that the CBO had to use health insurance provisions that were based on staff descriptions of the bill and not the actual legislative text.  So, the Committees marked up the bill without knowing what it actually costs and we still don’t know what it costs.

The cost matters because the budget outlook is disastrous.  (As an aside, the only event not being rushed is the Mid-Session Review of the Budget. It was officially due on a July 15th deadline, but the administration evidently has no desire to display the looming disaster.  While every administration has missed the deadline at some point, the contrast to the remainder of the Obama agenda is striking.)  Which brings us to the administration’s proposed bill on PAYGO.

PAYGO is a budgetary process that Democrats have advocated for years and some Republicans support.  The administration’s bill is far from perfect (see my testimony on the bill here), but that could easily be fixed during the deliberations of the Budget committees in the House and Senate.  Why, then, did the Democrats bypass the committee process entirely and take the bill straight to the floor?

It cannot be in the interest of good governance.  As Ranking Member Paul Ryan said in a letter to Speaker Nancy Pelosi:

….distribution of authority among Congress’ committees is one of the vital safeguards against the concentration of power that is always hazardous, regardless of political philosophy.  The House has seen an increasing and disturbing trend of rushing legislation straight to the floor, increasingly under limited rules for amendments. Serious deliberation in a transparent manner is the lifeblood of our legislative process; denying it diminishes a great strength of our democratic form of government. We are lawmakers and this trend diminishes our ability to fashion laws.” (see the complete letter here.)

So what is going on that includes even something so esoteric as the details of PAYGO legislation?

Clearly the Obama Administration wants to ram its agenda through and ignore the due diligence, deliberative traditions, and process that only the inside the beltway crowd knows.  They are counting on being able to say “we passed ____ (fill in the blank) legislation and addressed the pressing problems of America” even if the latter part does not pass any sort of substantive scrutiny.  And, they think they can get away with it.

Every administration begins with this sort of arrogance – the Obama example is unique only in its degree.  But in the process, the administration usually offends those that it ultimately needs to govern effectively and learns its lesson. When will this one?

Suddenly, the states – the stalwarts of fiscal probity who must obey balanced budgets – are in terrible shape. (A good summary of the state fiscal situation is from the National Association of State Budget Officers (NASBO); found here.)  States are in worse shape than local governments largely because their tax revenue sources – personal income, sales taxes, business taxes – are more cyclically sensitive than the localities.

California, which recently was reduced to issuing IOUs instead of paying its bills, is the poster child for budget problems, but the distress is widespread with significant declines in many states.  In general, the duress will be long-lasting, with budget difficulties for years.  California will take longer.  It has structural difficulties that put it in worse shape.  Given the recent failure of the ballot initiatives, it is difficult to see a quick resolution.  There are some (including CA budget officials I’ve talked to) that have turned to hoping there will be a bankruptcy-like crisis that will force a broad political reform.

What is the lay of the land?  According to the NASBO, nearly 50 percent of the states will see their budget shrink in 2009, with this rising to 75 percent in 2010.  The pace of decline, over 2 percent in 2009 rising to 2.5 percent in 2010 would be the “largest declines in the history of the Fiscal Survey, as well as the first time in which state general fund expenditures declined in consecutive years. Prior to 2009, actual state general fund spending had only declined in 1983.”

The cumulative shortfall by 2011 will approach $250 billion, of which states have closed only about 20 percent in 2009.  Cutting spending is difficult for states, as they are on the hook for unemployment insurance, Medicaid, and other cyclically-sensitive spending programs.  What about the windfall from the “stimulus” bill?  While the funds appear generous, they pale in comparison to the cumulative shortfall.  More importantly, the stimulus funds largely appear in 2009, while the states expect significant problems in the years to come.

Bottom line, the states have big problems that will not be solved by the feds.  The NASBO indicates that 42 states were forced to reduce enacted budgets in 2009 (only 13 states had to do so the year before).  Thirty-five states assume negative budget growth for fiscal 2010, up from 30 in 2009.

What does all of this mean?  First, and most obvious, this is not good news. States face a serious budget retrenchment – spending has to fall and taxes will rise.  The average citizen should not savor the prospect.

Second, the state fiscal situation is another federal budget threat. There will be a long line of governors suggesting – usually in disguised terms – policies that amount to a bailout for their budgetary woes.  The key policy question is whether the Obama Administration will hold the line and insist that the inevitable retrenchment begin immediately.

Finally, budgetary distress is tantamount to gubernatorial political woes.  In recent weeks Republican governors have suffered self-inflicted wounds from their international travels and missing internal fortitude.  Dealing with state budget woes in principled ways – as, for example, Governor Pawlenty did in Minnesota – will distinguish some.  On the other side of the ledger, Democratic governors will face the temptation to raise taxes in a recession. How will they respond?

Suddenly, just when you thought the Obama Administration had monopolized drama, the states are getting interesting.