So you're concerned about the debt-to-GDP ratio? Then listen to Rob Johnson, who separates the real white whales to harpoon from the harmless minnows. A new paper he co-authored with Tom Ferguson points out that austerity and stagnation most threaten our fiscal future. The American people are angry, and "there is a lot of valid rage in our society," Rob says. But "fears of magic thresholds like a 90% debt-to-GDP ratio or mythologies that have to do with the painlessness of cutting deficits are playing on those fears, but they're not sending things in a proper direction."

Is Social Security going to bring down the ship? Rob is "nominating Social Security as a minnow." It seems a bit fishy that those who avow it will go bankrupt by 2050 couldn't see a financial crisis just two years ahead of them, he points out. So perhaps that shouldn't keep us up in bed at night.

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So what is the largest fish threatening fiscal instability? "If you're doing a whale watch," Rob says, "the Moby Dick of the American budget problem has to do with... money and politics, the concentration of interests." And there are three things we spend our money on that hurt the budget most: wars, financial crises and health care. He points out that as a country we spend more on our military budget than all other developed countries put together, and "the American people carry that on their back." The budget could also be rocked by another large bailout of a financial institution -- a threat that looms larger as banks continue to be Too Big To Fail. "Anybody who calls themselves a deficit hawk should have been and should continue to be a financial reform hawk," Rob says. And lastly, we should all be most afraid of skyrocketing health care costs. As he puts it, "We are letting oligopolies be oligopolies in the health care industry, and that is the center of the problem."

So no, high deficits don't necessarily forecast stormy seas ahead. But there are things that might. He ends his presentation by saying, "If I were a bond speculator, I'd be worried if we don't invest in America. If I were a citizen, I'd be worried if we don't invest in America."

Be sure to check out the full Working Paper: "A World Upside Down? Deficit Fantasies in the Great Recession."

The payroll tax holiday in Obama's deal endangers our largest and most loved social program.

In trying to make a silk purse out of a sow's ear, the president's advisors added a payroll tax holiday to the tax agreement they were working out with the Republicans last weekend. After giving away Bush's estate and income tax cuts for the uber rich, they sought to get something back, and, they told me, the Republicans would not agree to the refundable aspects of the Making Work Pay Tax Credit, the president's own signature tax cut initiative included in the 2009 stimulus package.

Earnest White House and Treasury staff members have been assuring various interest groups all week that in negotiating a payroll tax reduction of some 32 percent (a 2 percentage point cut from the worker's share of 6.2 percent), they meant no harm to the long-term finances of the Social Security system. Not only is the higher tax rate proposed to be reinstated (without requiring a vote) after a year, but the Social Security Trust Fund is made whole by a transfer of like amounts from general revenues all during the year, so the Fund will even earn the same amount of interest it would have from payroll tax receipts. As they came under increasing pressure from Social Security advocates, the White House released a letter on Friday from Social Security's chief actuary confirming that the Trust Fund would lose no money.

But the Trust Fund is not actually the advocates' main concern. They're more worried about being able to get the payroll tax up again in 2012 after the emergency situation of a tanking economy has hopefully passed. The central problem is a political one. Already some Republican members of Congress have said that a move back to 6.2 percent will be seen as a tax increase (in fact, close to a 50 percent increase), always unpopular, especially in an election year. If the payroll tax isn't raised, squeezing the money out of general revenues every year when Social Security would be competing with all other spending could be extremely difficult, and pressure for benefit cuts would grow. As of now, the American people don't mind paying the payroll tax: 86 percent said so in a recent survey, so giving them a short-term gift they don't particularly want and, in exchange, putting the program that is their life support at risk is just a bad deal.

I have no doubt that the staffers working on this who have spoken with me mean well. They carefully explained to me that they set the size of the payroll tax reduction so that a person earning $20,000 per year would get a $400 tax cut, the same as under Making Work Pay; that required a 2 percentage point tax cut, which when aggregated to all workers paying the FICA tax is some $112 billion. They were pleasantly surprised when the Republicans agreed to that large a tax cut, which constitutes significant stimulus to the economy since much of that extra disposable income will be translated into demand for housing, transportation, meals, and so on.

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While a payroll tax cut would be good at getting small amounts of money into each paycheck, it has some other less desirable features as stimulus. Most importantly, a lot of it goes to high-income people who tend to hold onto added income. Everyone earning more than $106,800 per year (the maximum salary on which workers will pay FICA tax in 2011) will get the full $2,136 reduction, including members of Congress, the president, Wall Street traders, and top managers across the country, and many of these high earners will save rather than spend their extra income.

Under Making Work Pay, every person with earnings of at least $6,451 got the maximum credit of $400 and married couples with earnings of at least $12,903 got the maximum couples credit of $800 (whether one or both worked). These credits started phasing out at $75,00 for singles and $150,000 for couples, and no one earning more than $95,000 ($190,000 for couples) received anything at all. For low-income people who owed no federal income taxes, the credits were refundable, so an eligible person or couple received a check from the government. With a payroll tax reduction, every individual making less than $20,000 and every married couple earning less than $40,000 (roughly 40 million workers in total) would get less than they would under a Making Work Pay extension, but the payroll tax rebate at least gives them something back. Since Republican opposition to refundability would have left many low-income people with nothing had the income tax been used as the delivery mechanism, the payroll tax cut seemed like the better alternative to White House staffers concerned about low earners.

What is most troubling now is that even though the risk to Social Security has been pointed out to the White House, these same staffers continue to insist that the rebate must take the form of a payroll tax cut delivered in every paycheck in 2011 and that other alternatives won't do. For example, Congressman Brad Sherman has suggested issuing a rebate check to each worker early in 2011 for 2 percentage points of the 6.2 percent FICA tax each paid in 2010. Dollar-wise, that's essentially the same as giving workers 2 percentage points in 2011. Sure, there will be more workers in 2011 (if we're lucky and get some employment growth), but they could be included by issuing rebate checks early in 2012 based on what they earned in 2011. Also, even though research shows that lump sums aren't spent as readily as smaller amounts, the portion spent after 3-6 months is quite substantial. And since we will need stimulus all through 2011, the difference between these two distribution systems can't be so great as to make the Sherman alternative totally unacceptable to the White House -- when it has the very important advantage of never reducing the payroll tax rate to 4.2 percent and so never having to figure out how to get it back up to 6.2 percent. While Sherman's proposal virtually mimics the payroll tax cut, Nancy Altman, co-chair of Social Security Works and a leading advocate against the payroll tax rate cut, suggests a more progressive alternative, one that would likely increase the stimulative value of the tax cut -- an identical lump sum to every worker who paid FICA tax. Such a method would direct more dollars toward lower earners (the average benefits would be on the order of $800) and therefore generate more spending.

Many people are becoming aware of the dangers to Social Security from a cut in its tax rate -- phone calls, organized by groups like NOW and the National Committee to Preserve Social Security and Medicare, have been pouring into Congress and the White House. For sake of Social Security and the millions of women and men who depend upon it, I hope Congress will be able to negotiate a change in the agreement. Since the payroll tax cut is viewed as a Democratic win, the Republicans should not object to whatever mechanism the Democrats choose to deliver the same amount of funds. Of course, it would be better for all if the White House would just do the right thing and stop insisting on a payroll rate reduction.

Heidi Hartmann is an economist and president of the Institute for Women's Policy Research, which she founded in 1987.

President Obama can solve the economy's problems and win back his base, but he has to get with the program first.

For once, let's praise President Obama (marginally), not bury him. As Bo Cutter has already argued, in the aftermath of the elections, the president probably did the best he could do on taxes. Ideally, the issue shouldn't have even been something to haggle over in the first place had the Democrats (including the president) dealt with it before the midterms. Had the Party leadership shown an ounce of backbone, our political profiles in courage could have bargained for something much more significant in exchange for keeping the Bush tax cuts. But they didn't, and the GOP ruthlessly played their own hand to perfection in the electoral aftermath. One has to admit to a grudging sense of admiration for the Right's relentlessness as the Obama administration bargains for crumbs on the table, calls that dinner, and then expects cheers from its supporters for the resultant compromise.

That said, the president's petulant rant directed at his base was pathetic and misconceived in the extreme. The "No Drama Obama" guise clearly does not extend to his now frustrated supporters. Obama still genuinely does not have a clue as to why he has lost the trust of so many progressives. Many would have been prepared to cut him some slack if he had given them anything over the past two years, rather than a perpetuation of Rubinomics -- an economically regressive blend of crony capitalism and deficit reduction fetishism.

Reviving the old canard about the public option in health care, as he did earlier this week, just reminds people of the paucity of his vision and his corresponding weaknesses as president. Obama loves cutting deals, claiming that he is "getting things done for the American people", even when the actual substance of his legislative efforts come to virtually nothing (as in the case of both financial regulation and health care). His presidency is all about form and presentation over substance.

That said, the anger of the president's base is somewhat misdirected right now. The real problem is that the repeal of the Bush tax cuts at the upper end wouldn't have solved income inequality, which legitimately vexes many. Any good accountant worth his salt can always find a clever tax avoidance strategy for the super wealthy. The tax system's very complexity facilitates this, that complexity being a product of a code that has become yet another political plaything in the hands of Washington's K Street lobbyists. To deal with income inequality, you need something more radical. You need reforms such as caps on executive pay and probably a system that simplifies the tax structure (to avoid creative tax avoidance), along with a broad base and a few basic, low rates to ensure a modicum of compliance.

Additionally, the notion that these tax cut extensions will "add" $700 billion to the deficit is nonsensical. One cannot predict the impact of government spending decisions absent a broader economic context. Applying a static revenue analysis to the deficit embraces deficit hawks' logic, who make comparable claims when they argue that cutting government spending absent any consideration of the economy's underlying condition will automatically reduce the budget shortfall as a percentage of GDP.

Ultimately, the president (and what's left of his rapidly imploding party) needs to get off this deficit fixation. It muddles the Keynesian message to say that we don't need fiscal austerity in the midst of a serious recession -- except we urgently need to reduce the dangerous deficit by taxing the rich.

The whole focus on the deficit itself is profoundly misconceived. One of the state's most important elements of public purpose is to maximize employment. Once the private sector has made its spending and saving decisions based on its expectations for the future, the government has to render them consistent with the objective of full employment. It can't do this if it continues to focus on bogus questions of "affordability" and "national insolvency".

By falling into the trap of appearing to be obsessed with punishing the rich, the Democrats muddy their message and look reactive. Instead of fulminating about a tax deal that effectively prevents more government spending from being REMOVED from the economy (rather than actually adding more to it in real terms), the party should be offering a plan to grow the economy in a more equitable way. Instead of offering reforms that serve to preserve the interests of big financial companies, the president and his party should focus on devising and implementing government programs that directly sustain employment and restore states' finances.

To make matters worse, the Obama administration has been far too preoccupied with "paying for" additional spending through tax hikes or spending cuts elsewhere. It does not appear to be willing to let the fiscal position of the federal budget grow as needed to meet current challenges. All sorts of bad policy decisions have flowed from that wrongheaded paradigm.

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Fortunately, when announcing the tax deal with the GOP, the president for once omitted discussion of the longer-term deficit issues. But he has long been one of the main culprits here in fomenting deficit hysteria because he fails to understand that fundamentally, taxes are not about "raising revenues" to "fund" our government, but instead act as the brakes and accelerators for the economy as whole.

As my friend Michael Lind wrote to me in a recent email exchange, America's progressives have forgotten that the focus of mid-century social democracy was on abundance through a mixed industrial economy, with redistribution as an afterthought. The right has a bogus plan for economic growth, the left has -- what? Weatherizing homes for fuel conservation? Wind farms and solar panels?

Since the time of the Clinton administration, the Democrats have focused on "safeguarding the solvency" of entitlement programs, while neglecting to come up with a growth model that would do away with silly discussions about how these programs are allegedly "bankrupting" the country. In the specific case of Social Security, the party has fallen into the trap of looking at the "financial", as opposed to real, constraints of the program. (The former are in reality trivial, as their resolution would require only relatively simple adjustments in accounting procedures, instead of raising taxes now or lowering benefits in the near future, or even running budget surpluses.) The way the deficit commission was set up by this very president virtually ensured a wrongheaded focus.

The real issue in regard to entitlements such as Social Security relates to the real provisioning for retirees with sufficient quantities of resources in the future. This can only be resolved by increasing productive capacity in the future, thus ensuring that a sufficient share of resources will be transferred to the elderly. These can be achieved by increasing the rate of private and public investment, together with revisions in taxation, at the time the baby boom generation is well into retirement.

Nobody in the Democratic Party, President Obama included, is thinking along these lines. Instead, the philosophic void left by the abandonment of the New Deal and the Great Society has been filled by neo-liberalism and Wall Street-centric policies. The president himself has championed these philosophies ever since he got his party's nomination in 2008,and promptly began stuffing his team with failed Clintonite retreads. There is a reason why the Dow Jones rose almost 600 points the day that Lawrence Summers and Tim Geithner were appointed to his economic team. The markets knew that Santa Claus was coming to town. That is the real reason for the unhappiness of his party's base. That's not the kind of change his supporters were looking for. Nothing the president has done since his inauguration marked a decisive break from the past failed policies embodied by these figures.

At the end of the day, neither the president nor his advisers understand that a budget outcome is only effectively unsustainable if it pushes nominal aggregate demand beyond the capacity of the economy to absorb that spending in real terms (that is, beyond the capacity to increase real output). The financial "funding problems" that obsess his Treasury team are more apparent than real. When growth resumes, the budget's automatic stabilizers will go to work and eat into the deficit, and the US will cut back stimulus spending to further reduce the deficit. Private domestic saving will stabilize as their balance sheets are restored to some semblance of sustainability following the debt binge. The net public spending required to support that saving and maintain growth will also stabilize.

A sovereign government's budget is never unsustainable in narrow financial terms. It can run whatever deficit it chooses from the perspective of financial viability. As my colleagues Tom Ferguson and Robert Johnson have argued, private oligopolies in health and defense spending, along with the possibility of another banking crisis, are the real threats to the deficit, not entitlements or marginal changes to the tax system.

The neo-liberal era has been associated with the erosion of working conditions and rising inequality in outcomes far beyond anything that could remotely be justified by disparate individual or sectoral productivity trends. The president doesn't understand this. His base is legitimately peeved. He continues to champion a system that has generated a massive redistribution of national income away from workers and productive sectors. Rather than tinkering around the edges of a profoundly corrupt tax system, the president has to embrace a completely different growth model going forward. This has to be the focus of what's left of his time in the White House, especially if Obama wants to extend it beyond 2012. Do this, and the president will find that his "sanctimonious", "whiney" base might actually become enthusiastic about him again.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

Some issues to consider before throwing support behind the compromise.

The deal is out. Ezra Klein has details, and here is the New York Times' take. It strikes me as exactly what the administration was hoping to get. They had been pushing for this combination of a payroll tax cut and business credits since at least September, for an entirely tax-cut driven second stimulus package.

My initial thoughts on the deal:

1. No Raising of the Debt Ceiling. This should be a no-brainer and a deal-breaker for liberals considering supporting this bill. Repeat: no Democrat should support the compromise without this issue being addressed. The debt ceiling is going to be hit sometime early next year, between February and April. Alan Simpson is already bragging about how this vote will be a "bloodbath", forcing the austerity agenda into action. It would not surprise me if the new Congress moved to cut back on the stimulus program and force deep cuts at the moment when this new stimulus is just getting going, and we can no longer assume that Obama will show leadership in averting this crisis.

Since this is a noxious compromise, there should be no room for the GOP to turn around and slash aggregate demand a third of the way into 2010. This compromise gives cover for each side to extend deficits to benefit their core constituencies.  ]If the GOP hits those struggling to get back into productive work in this weak recovery by slashing the budget (and of course leaving the high-end tax cuts in place), we got taken. And Digby is already catching the pundits processing this deal by concluding that Obama needs to call for deficit cutting in the State of the Union, earlier than the debt ceiling issue arises. I could see 2011 being the year of a hundred little pay-freeze type moves, and raising the debt ceiling would be the focal point.

Since we are giving the Republicans exactly what they want, and they appear to seriously want it, let's get this deal without offering up any other pieces of flesh. Unless the administration wants to get cracking on Social Security, in which case a debt ceiling crisis is a perfect opportunity.

2. Repealing the Bush Tax Cuts: Gone, Goodbye. It is not very likely that the upper-income tax cuts will be pulled back in 2012. I simply don't see a way in which the situation is any better then -- unemployment is projected to be at 8%+, with a fragile recovery still in its infancy. The idea that Obama's team will be in any better position to trigger it then is weak. At that point, following the deficit commission, the idea will be to lower tax rates and broaden the base, which means that we'll probably be focused on lowering the high-end marginal tax rates even further while removing subsidies. Except that I also expect those subsidies to be gamed.

For the past 30 years, the real gains to the increased productivity of our country have been captured by the top 2%, and now they've managed to give themselves a major tax cut with Obama in the lead. Great run, you. Regardless, there is now much greater uncertainty than there was before, although the Financial Services Forum doesn't think so. Huh.

3. Are We Starting the Deficit Commission's Plan? Ever had a dinner that you thought was dinner, but the other person thought was a date? Does the deficit commission think we are on a date with this plan? I'm really worried that liberals will find that they've de facto signed up for the deficit commission's recommendations by taking their first recommendation on the Social Security tax cuts. Administration officials are already saying this is paid for out of general funds, no need to worry. But I am worried.

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4. Business Expensing. The business expensing credits are accelerated. My opinion on this, following JW Mason's reading of Goolsbee's early research, is that this mostly shifts rents around rather than generates new demand. Goolsbee replied to Mason's critique and the relevance of his early work in that link. I'll leave it to you to determine your own opinion.

5. Are Tax Cuts Extra Weak in This Recovery? Tax cuts are a weak form of stimulus. And what is extra interesting is that this paper, Does the Effectiveness of Fiscal Stimulus Depend on How it is Delivered?, based on some survey data, found that people were less likely to "mostly spend" the 2009 tax cut as opposed to the 2008 one. Twelve percent less likely, with 4% more likely to "mostly pay debt" and 8% more in the "mostly save" category. The new Social Security cuts will replace this behavioral tax cut.

There's debate as to why this is: some think that it involves the quirks of behavioral economics, in which people think Obama raised their taxes instead of instituting the largest middle-class tax cut ever because Obama never said so. I think it is more likely to be a result of the large debts Americans took on as a result of the credit bubble. If we had cramdown, with an impartial judge vetting out some of the bad mortgage debt that the bailouts should have taken care of, I'd be more comfortable with tax funds going straight to deleveraging. I'm less comfortable as it stands. (Felix Salmon: "But the middle- and upper-class tax cuts, paid for by extra borrowing by Treasury, will be used in large part to pay down personal debt. Essentially, we’re replacing private debt with public debt.")

Rather than straight fund deleveraging, I'd rather see infrastructure get built so that the new workers can pay down debt and the country can get a public good out of the chaos. Especially since Wall Street seems happy to take the proceeds, park them at the Fed, collect money and give themselves bonuses.

6. Extending unemployment benefits is a smart idea. The latest and greatest numbers show that the increase in employment from the demand side outweighs the decrease in employment from the supply side, and that's before you consider liquidity effects. If that is gibberish, here's plain English: extending unemployment benefits is a go in the economic sense, even before you consider that it is humane to not starve workers caught in the aftermath of a bubble consisting of Wall Street's toxic debt instruments.  This does nothing for the 99ers, though. And like the tax cuts, it doesn't so much create new demand as it maintains old demand; it's not stimulative, just anti-contractionary.

7.  No Benefit From The High-End Tax Cuts. Don't let anyone spin you. We'll see unemployment come down somewhere between 0 and 0.1% from extending the high-end tax cuts. We are being asked to take on a massive deficit while nobody is able to really confirm that the net effect on employment is indistinguishable from zero. That's compared to the 0.2% to 0.5% decrease with middle-class tax cuts.

I'm not sure what to think or do next.  Your thoughts?

Mike Konczal is a Fellow at the Roosevelt Institute.