House Speaker Nancy Pelosi holds a press conference at the Capitol to commemorate the 75th anniversary of the Social Security Act. (Pete Marovich/ZUMApress.com)

This summer, Social Security – the government program that provides a steady check for seniors – turned 75. In Washington, lawmakers celebrated its platinum anniversary not with champagne, but with a heated argument over whether to reform the costly entitlement program by slashing benefits or raising the retirement age. Indeed, with the national debt over $13 trillion and the government running at a $1 trillion a year loss, the Obama administration created a deficit commission — the bipartisan National Commission on Fiscal Responsibility and Reform — to find ways to return the country to the black. In anticipation of its report, and in anticipation of possible changes to the program, lawmakers have started discussing how to reform Social Security.

[Economy1] After running a surplus for years and building up a sizable trust fund, Social Security now runs in the red. Though the program is far from bankrupt, more money is pouring out than going in. Economists project that the trust fund will be emptied by 2037. From there, opinions diverge on how far into debt the program will fall if nothing is done.

“Social Security is not in immediate trouble. There’s been a lot of exaggeration of that problem,” says Alice Rivlin, senior fellow at the Brookings Institution and a member of the deficit commission. “It is not on a solid basis for the long run, however. The sooner we act, the less we have to do.”

The problem is, there’s no consensus on what form that action should take. And many of the most commonly discussed tactics for stemming the flow of red ink would disproportionately impact lower-income Americans, the segment of the population that depends on Social Security the most.

One idea that comes up frequently is raising the retirement age. House Minority Leader John Boehner (Ohio), for instance, proposes lifting it to 70; some economists have suggested lifting it to as high as 75.

The idea sounds good: People are living longer, so it makes sense they will be working longer as well, right? But raising the retirement age will not necessarily keep people in the workforce longer, says Dean Baker, co-director of the Center for Economic Policy Research. For lower-income Americans, it would often just consign them to a retirement of lower benefit checks.

Already, around two-thirds of non-disabled workers elect to begin receiving smaller checks at 62 rather than full payments at 65. The hardship of raising the retirement age falls disproportionately on low-income workers who work in physically demanding professions, jobs they may not be able to continue through their seventh decade. According to Baker, 45 percent of workers over the age of 58 hold physically demanding jobs. Among those who lack a high-school diploma, that percentage skyrockets to around 75 percent. “If the hope is that people will work longer, that’s a very difficult thing for low and moderate income Americans to do,” Baker says.

Moreover, though the average lifespan has increased since Social Security’s creation, those extra years aren’t enjoyed equally by all Americans. Overall, Americans are living about 7 years longer. But the poorest 20 percent of Americans are living just two years longer – coinciding with that increase in retirement age. Baker notes that minority Americans fare even worse. “Even at 65, there’s a gap of about two years in lifespan. Also, on average, they have much lower wealth at retirement, so they’re much more dependent on Social Security.”

Center and right-leaning policy experts say another way to limit Social Security expenditures is to change the baseline for the benefits calculator from a wage index to a price index. Since the price of goods tends to grow more slowly than wages do, this shift would reduce the amount the program would have to pay out in the future. Supporters of this proposal say that because the benefits will still increase along with price inflation, seniors won’t suffer a shortfall in real-dollar terms.

This logic works in theory. But in practice, it would seriously impact lower-income Americans. Why? Seniors spend differently than average-aged workers: They buy more healthcare goods and services. And healthcare costs are skyrocketing well above the average inflation rate, so lowering benefits would make it more difficult for retirees to cover their costs. The more economically strapped the American, the more it would hurt.

Other plans would have less impact on those least able to shoulder the burden. One idea would be to reduce benefits for wealthy retirees. The idea is that “Bill Gates doesn’t need social security,” says Brookings’ Rivlin.

The problem is deciding where to set the bar: Too low, and you ensnare middle-class families, too high, and you only earn the ire of the superrich without contributing much to the bottom line. Some experts, including Rivlin, think the political cost probably wouldn’t be worth the impact on the bottom line. Polls show that even wealthy Americans want their Social Security, and are willing to pay for it. The government might net a little more money, but it would lose the public support and buy-in of wealthy (and thereby influential) citizens.

“U.S. benefits relative to earnings are low by comparison with those in other wealthy nations,” says Henry Aaron, senior fellow at the Brookings Institution. “I don’t think there’s a strong case for cutting benefits on the merits of the idea. In my view, the bulk of the fix should come from the revenue side.”

Many economists on the left share that sentiment. “It makes sense to fix social security by increasing revenues and making sure a good chunk of those revenues come from the high end of the income distribution,” says Monique Morrissey, an economist at the Economic Policy Institute.

Raising the payroll cap is one popular idea. Currently, the first $106,800 an American makes is subject to the Social Security tax; above that, the earner pays nothing. “If you eliminate the cap, you’re probably getting very close to eliminating the entire Social Security deficit for the next 75 years,” says Christian Weller, senior fellow at the Center for American Progress. “The more common proposal is to raise the cap so 90 percent of earnings are subject to the tax, which would eliminate about a third of the deficit.”

Another idea under consideration is raising the payroll tax rate by a fraction of a percentage point. Although the flat rate of this tax is inherently regressive, some left-leaning experts say it’s preferable to a cut in benefits, especially when the prospect is discussed in conjunction with other modifications like a minimum benefit, as described in a recent report by the Urban Institute.

Not everyone thinks adding to the payroll tax rate is the way to go, though. “It seems to me that raising the payroll tax is the least desirable way to try to move the program towards solvency,” says Will Marshall, president of the Progressive Policy Institute. “It’s a tax on work and makes it more expensive for employers.”

Marshall supports ideas more commonly embraced by the right to make up the shortfall, including an increase in the retirement age and a downward adjustment on the formula used to calculate benefits.

Some Republican politicians are still pushing for privatization, pointing to the rise of the stock market over the long term. Mike Tanner, senior fellow at the Cato Institute, asserts that even if a retiree cashed out at the trough of the market in 2009, he or she would have still experienced a growth in wealth. Given the wariness with which many Americans bruised by a drop in their 401(k) and home values now view the stock market, though, privatization may be a tough sell at least until the current bear market fades from our collective memory. “A lot of Republicans seem to view private investment as some kind of panacea, which I don’t think is correct,” says PPI’s Marshall. “That wouldn’t solve the underlying structural problems.”

Right-leaning experts tend to paint a bleaker view of the Social Security situation in general. Cato’s Tanner explains that the difference is that they include in their calculation of upcoming obligations the cost to be borne by the Treasury when the program cashes in its trust fund bonds. Obviously, that money will have to come from somewhere, but progressive economists like CAP’s Weller, counter that it’s disingenuous for the right to say those bonds pose an economic risk when the Social Security surplus is one factor that was used to justify Bush-era tax cuts in the first place.

Experts of all stripes like to point out that Social Security reform should be a snap compared to changing more complex programs like Medicare. In a strictly economic sense, that’s true. But the discussion around Social Security often threatens to collapse under the metaphorical weight lawmakers have conferred on the program. “It’ll probably be more politically determined than substantively determined,” PPI’s Marshall concedes. “Right now neither side wants to come out of its assigned place.”

A new report shows that the income gap between rich and poor in America is at an eight-decade high — the largest differential since the period immediately preceding the Great Depression. And economists fear that the education and job-creation programs that could bridge this gap are lacking in the recessionary economy.

[Economy1] On June 25, the Center on Budget and Policy Priorities released a report on the growing income gap in the United States. While the data it studies are not new — the income stats end at 2007, just before the advent of the current recession — the report synthesizes both census and Internal Revenue Service information to paint a more complete picture of the finances of the various strata of American society.

“It’s given us the first clear, comprehensive picture of income distribution over the economic cycle that ended in 2007,” said Arloc Sherman, senior researcher at the CBPP. “Now we know definitively that income inequality grew in that cycle. Just before the recession hit, we know that inequality was heading into record-breaking territory.”

In 2007, 17.1 percent of all after-tax income in the country went to the top one percent of earners. According to Emmanuel Saez, an economist at the University of California, Berkeley, who used a slightly different methodology in calculating his figures, the proportion of the country’s income going to the top one percent is at its highest since 1928.

The CBO data studied by the CBPP show that in just under three decades, the after-tax income for the top one percent rose by 281 percent. By contrast, incomes for the middle quintile of income distribution rose a much more modest 25 percent over the same time period, while incomes for the bottom fifth increased by only 16 percent. If Americans in the middle fifth of the income distribution curve had seen their incomes rise at the same rate as those of the top one percent, that would equal an extra $13,000 in annual income for middle-class households, says Sherman.

A variety of factors, some stretching back a generation or more, have played a role in cultivating this inequality. Throughout the generation following World War II, incomes rose in a more evenly distributed manner, and a broad middle class was established. This trend reversed itself in the 1970s, when the income gains of the rich started outpacing those of the rest of the country.

Economists say there were several factors at play, some of which might have been unavoidable. The growth of technology rendered low-skill manufacturing jobs redundant. Globalization accelerated this decline as companies moved their production facilities offshore to take advantage of lower labor costs. The shift from a manufacturing to a service economy weakened the collective bargaining power of unions, a key force in establishing the wages on which America’s mid-century middle class was built.

“Union contracts helped bolster wages across the distribution, and the manufacturing sector was historically a highly unionized sector,” said Heidi Shierholz, an economist at the Economic Policy Institute, a think tank. Declining union membership since the 1950s has eroded manufacturing wages.

Industrial and corporate deregulation added fuel to the fire. Executive compensation swelled even as the minimum wage failed to keep pace with the rising cost of living. Shierholz said a robust minimum wage doesn’t only benefit those who are paid minimum wage. Rather, that baseline impacts lower-income wages across the board.

Tax policies also widened the income gap. While many point to George W. Bush’s tax cuts as a key accelerant in the runaway income growth of the wealthy, economists note that other, long-standing parts of the federal tax code played a role as well.

“Our housing policy, with the mortgage interest reduction, is absolutely ridiculous in that most of the subsidies go to the richest people,” said Dean Baker, co-director of the progressive Center for Economic and Policy Research.

The net result is that the middle class today is in a precarious position, and the working class even more so. For much of the past decade, loosening credit standards and rampant consumer lending fueled by the housing bubble camouflaged the increasingly skewed dispersal of resources.

“The notion that ever-increasing home prices are going to provide us with wealth is clearly not sustainable,” said Lawrence Katz, a professor of economics at Harvard University. “There was a mirage of consumption growth, so some of the growth of inequality didn’t fully show up in consumption rates,” he said.

While the drop taken by the stock market during the recession has diminished the level of inequality from the 2007 levels shown in the CBPP report, the middle class is struggling more than ever as a result of the housing crash. “It’s a huge issue,” said Baker. “They’re getting to retirement and seeing most of their wealth vanish, since most of that wealth was in their house.”

As problematic as this is for the middle class, the households at the bottom of the income ladder are even worse off.

“One of the things we know about the bottom fifth is that it’s harder for them to move up,” said Heather Boushey, senior economist at the Center for American Progress. “We talk a lot about encouraging people to work their way out of poverty, but without middle-class jobs, this consigns those at the bottom to staying there.”

Economists fret that the legacy of the wealth chasm will be greater than simply a shaky foundation for the country’s already-slowing recovery. Profound inequality sows the seeds for social unrest and widespread disenfranchisement.

“Politics have become increasingly rife with class conflict,” Boushey said.

The EPI’s Shierholz concurs. “When you have both high inequality and low mobility, we’ve turned into a place that’s inconsistent with American values,” she said. “It becomes a set class system.”

Even though the recession has put a small dent in the income gap, most economists agree that if the status quo holds, the trend will continue apace when the economy rebounds. Following the dot-com crash and 2001 recession, the incomes of the top one percent dropped from 20.6 times that of the middle fifth to 14.3 times as high. But this flattening of the income distribution disappeared when the economy recovered. In 2007, the top one percent earned 24 times as much as the middle fifth.

Economists say there’s no silver bullet for narrowing the income gap, but a number of policies and programs could help. First up, says Chad Stone of the CBPP, is letting the Bush-era tax cuts expire on schedule. “That will return rates at the top to approximately where they were at the boom of the 90s,” he said. Some say the imbalance could be partially offset by a more progressive federal tax code, a higher minimum wage and legislation that gives workers more bargaining power, while CEPR’s Baker suggests what he terms a “financial speculation” tax to capture some of the outsize profits generated by Wall Street and the financial sector.

But economists say the real key to regaining lost ground, especially for the middle class, is cultivating large numbers of jobs in new and growing industries like green technology and health care, and providing unfettered access to higher education so middle- and lower-income Americans can train for these careers.

“I think it’s widely agreed that education plays a huge role here and more so than in the past,” said Ron Haskins, an economist at the Brookings Institution. “The problem is a lot of people don’t have skills, and that’s because our high school dropout rates are high and people don’t go to college.”

The flip side of that coin is having jobs available for young people after they’ve invested in their education. “There’s potentially a lot of growth in health care and skilled manufacturing, but we need to do a much better job of providing access to training,” said Harvard’s Katz. “The traditional jobs that have provided wages to the middle class are clearly not doing well in today’s economy and are unlikely to come back. We need to think about a different middle class.”

“What we need is a policy conducive to innovation and entrepreneurship,” said Will Marshall, president of the Progressive Policy Institute, a think tank. “You need the energy of invention just as we saw in the late 90s. We need another spurt of innovation-fueled growth.”

“Inequality is one of the great structural challenges facing America,” Marshall continued. “It raises questions about whether the American dream still works. … That’s why it demands attention from policymakers as something we’ve got to squarely face.”

Sens. Mitch McConnell (R-Ky.), Richard Shelby (R-Ala.) and Judd Gregg (R-N.H.) (EPA/ZUMApress.com)

For the past year, Republicans have insisted that Congress take up legislation to stop the losses at Fannie Mae and Freddie Mac — the government-sponsored enterprises that buy up and repackage mortgages, keeping loan prices stable. Fannie and Freddie have incurred more than $150 billion in losses since the burst of the housing bubble. “In my view, it’s simply not acceptable for some on the other side to suggest that we have to rush this [Wall Street] bill through Congress, but that it’s okay to wait another year to address the GSEs, which we all know played a central role in the financial crisis,” Sen. Mitch McConnell (R-Ky.), the minority leader, argued earlier this month, a contention often repeated.

[Economy1]But the Republicans never said how they thought the GSEs should be reformed — until now. Last Wednesday, Sen. John McCain (R-Ariz), Sen. Judd Gregg (R-N.H.) and Sen. Richard Shelby (R-Ala.) proposed an amendment to Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill, the GSE (Government Sponsored Enterprise) Bailout Elimination and Taxpayer Protection Amendment.

Releasing the proposal — with numbers, dates and directives aplenty — Gregg commented, “Fannie Mae and Freddie Mac are synonymous with mismanagement and waste and have become the face of ‘too big to fail.’ The time has come to end Fannie Mae and Freddie Mac’s taxpayer-backed slush fund and require them to operate on a level playing field.”

But housing market experts describe the Republicans’ proposal as disastrous. Analysts from both sides of the aisle contend that the proposal would unwind Fannie and Freddie so quickly and precipitously that it would destabilize the entire housing market: pushing mortgage prices up, pulling support from low and middle-income Americans and ending the nascent — if at all extant — housing recovery.

The GSE amendment would effectively shutter the mortgage giants, which together backstopped 97 out of 100 new mortgages in the first three months of the year, according to Inside Mortgage Finance. It would keep keep the current government conservatorship in place for 24 months (or 30 months, if the Federal Housing Finance Agency determines that market conditions are “adverse”). Then, it would begin begin the process of dissolution.

Were Fannie and Freddie to prove “viable” as private institutions (a term left ambiguous) after 24 or 30 months, they would become highly regulated institutions for three years, before the expiry of their charters. They would have no affordable housing goals, would have to reduce their mortgage assets yearly, could not purchase mortgages exceeding median-home values and could only buy mortgages with certain minimum down payments — among other provisions. Additionally, they would have to pay taxes. Were Fannie and Freddie not “viable” in two years — likely, given that Fannie reported yesterday that it does not see itself reporting a profit for the “indefinite future” — the amendment puts them into receivership.

Housing experts say that the bill would impact every participant in the housing economy, including builders, buyers, developers, lenders and banks. It would make vanilla mortgages — such as 30-year, fixed-rate mortgages — much more scarce, and would make all mortgages more expensive. It would remove a major source of liquidity in the mortgage market, causing credit problems at mortgage-reliant banks. It would also rapidly reduce the number of homebuyers.

Experts describe the McCain-Gregg-Shelby amendment’s transition as too much, too soon and too blunt. Kenneth Posner, who analyzed Fannie and Freddie for Morgan Stanley and is the author of Stalking the Black Swan, describes the plan as going “cold turkey” when it might be better to “use methadone.”

“The issue is that what Fannie and Freddie issue is considered close to government debt, and there is no limit on their ability to grow. That was fine a long time ago when they were small. But now, they’re big — we’re creating trillions of dollars of Treasury-like debt,” he explains. “We’re also dealing with the reality that too much stimulus for the housing market is a bad thing. That’s what the Republican [proposal] is getting at. But it does not answer the question of the transition [away from that support].”

Barry Zigas, the director of housing policy for the Consumer Federation of America, is blunter. He says that the Republican approach takes a “meat-axe” to an extremely fragile market. “It takes a very prescriptive and dangerous approach to a problem that at this point does not require it,” he says, noting that the Senate has not even held hearings on how to deal with Fannie and Freddie yet.

“It puts any housing recovery in jeopardy — the amendment is a huge gamble that forces the government to quickly and radically restructure these two companies without providing a clear path to a stable mortgage market in the future,” he says. “For one, it would raise down-payment requirements precipitously, which would be injurious to low-income communities and communities of color.

“This is a very heavy-handed and ultimately very unhelpful approach to a complex problem.”

“Some of it is serious. Some is trying to stir up trouble,” says Dean Baker, the co-director of the Center for Economic and Policy Research. “It doesn’t make sense to talk about dismantling Fannie and Freddie yet — and we’d really have to think this through more thoroughly. It does not, for instance, explain how it would sell off Fannie and Freddie’s assets, or in what form. Who would back them? What is the benefit to rushing this?” Baker says. “The risk is so obvious that the proposal seems strange.”

And with such obvious risks and despite Republican pressure, Democrats have punted on the question of how to reform Fannie and Freddie. This spring, the Treasury Department released a set of seven questions it said it was attempting to answer — stating that it was working on reform but needed more time. And yesterday, Sen. Mark Warner said the administration plans to release its Fannie and Freddie proposal next year.

“I think it’s a fair claim to make to say we haven’t done enough to address Fannie and Freddie,” Warner said. “It is the big elephant in the room that hasn’t been addressed.” But, “We’ll come back next year and take on Fannie and Freddie in a more thoughtful way.”

Now, on to the controversial amendments.

Up today: Sen. Bernie Sanders’ (I-Vt.) amendment to authorize the Government Accountability Office to perform a more thorough audit of the Federal Reserve’s books — that is, Audit the Fed. But would auditing the Fed really do? And why is the Fed and the administration so afraid of it? Mike Konczal, the blogger also known as Rortybomb and a fellow at the Roosevelt Institute, speaks with The Center for Economic and Policy Research’s Dean Baker to find out. The whole post is worth a read, but here is a snippet:

The Fed has been giving two arguments against having the government audit their books to see who got what money under what terms, what the collateral was, etc. and making that information available.

Now with the audit — it’s up to Congress to decide whether to release the information to the public, so having the government audit it doesn’t mean it automatically becomes publicly available. It would be made available to the appropriate committees who would then make that decision. I personally would say it should be made public, but in any case the point would be to get a full accounting here so we can know what happened with the money.

The first argument the Fed is giving is that this would create a stigma for the banks. I’m kind of at a loss to understand what they even mean. They can give an argument that if you have a banking crisis and Bear [Stearns] is about to meltdown, and they suddenly need money from the Fed, and there’s this public statement saying that Bear went running to the Fed and borrowed $5 billion, that puts Bear in big trouble and a bank run could start.

But we’re talking about a year and a half, two years later [when the auditors might release that information]. So I don’t understand how that creates a crisis. Does that create a stigma, that the banks were in trouble? Well maybe, but I’m not sure why we should care. The Fed is not in the business of covering up banks’ bad financial shape. The principle we want is transparency. If they know a bank’s in trouble, again we don’t want to create a run, but after the fact the Fed should be making the banks’ condition more transparent, not helping them conceal it, as they did with Lehman for many months,.

So this stigma story I don’t quite understand. The other argument is this would hurt their independence. But again, I just don’t see any legitimate meaning of that term, independence, that it interferes with. We want them to make what they think are the best calls. But after the fact, do they have to answer for it? Should they have to say that these are the calls we made, this is why we made them? Absolutely.

I don’t understand how that isn’t independent. So those are the two arguments, on the one hand the stigma that will be created if at some point it’s known that banks go to the Fed, and on the other hand, that it somehow harms their independence. I mean, the FDA has to give a full account, we reviewed this drug, we reviewed that drug, this is why we approved this drug, here’s why we didn’t. I don’t understand why the Fed should operate differently.

Testifying before the House Subcommittee on Housing and Community Opportunity, headed by Rep. Maxine Waters (D-Ca.), he says that home values still need to deflate 10 to 20 percent. To ensure that underwater homeowners do not simply walk away from their mortgages, Congress should create a right-to-rent program letting people undergoing foreclosure rent their homes for five or ten years:

[M]ost homeowners who purchased their homes near the peak of the market are unlikely to ever see any equity in their home. In addition, even they are likely to be paying more in ownership costs than they would to rent a comparable home, even if they were to benefit from a modification and receive a lower cost mortgage….[An] efficient approach would be Right to Rent legislation that would temporarily change the rules on foreclosure to allow homeowners to stay in their homes, paying the market rent for a substantial period of time following foreclosure. By incentivizing lenders to negotiate, Right to Rent would immediately benefit all homeowners facing foreclosure. Finally, Right to Rent could be implemented at no cost to taxpayers and would require no new bureaucracy.

House Financial Services Committee Chairman Barney Frank (D-Mass.) (EPA/ZUMApress.com)

As job creation continues to be the caboose of economic recovery, employment experts of all stripes are hiking the pressure on Congress to tackle the crisis by encouraging employers to cut hours rather than firing workers. And more and more lawmakers are taking heed.

Seventeen states have already adopted so-called “job-sharing” programs, which encourage employers to reduce workers’ hours in lieu of firing them outright. The state government, in these cases, then steps in to make up a portion of the lost wages. Between 300,000 and 350,000 workers are participating nationwide, saving roughly 100,000 jobs that would have otherwise been scrapped, according to Dean Baker, co-director of the liberal Center for Economic and Policy Research and a long-time supporter of the concept.

[Economy1] Yet that’s just a drop in the bucket relative to the 12-million-job crater the country is in, leading many economists — not all of them liberal — to push Congress for a much larger federal investment in job-sharing programs.

Kevin A. Hassett, director of economic policy studies at the conservative American Enterprise Institute, told lawmakers this week that such programs are among the most targeted and cost-effective ways to tackle the nation’s jobs crisis, which has left nearly one in five workers without a job or underemployed.

The concept is simple: Rather than laying off a few workers during lean times, businesses instead could spread the pain by reducing work hours for many. In Hassett’s example, if five workers had their hours cut by 20 percent it would prevent one worker from being fired at no cost to the company. And if Congress were to alter its policies surrounding emergency unemployment insurance, those workers could then access a portion of those benefits — in this case, 20 percent.

Workers benefit by keeping their jobs. Employers win because they don’t have to train new part-time workers. And states would gain because their share of the partial benefits would be less than they would otherwise have to pay.

“Right now the government only really shares in supporting that worker if you lay the whole worker off,” Hassett said Tuesday before the House Financial Services Committee, advocating for new stimulus spending that’s been attacked by the Republicans who invited him to testify. “By adopting job sharing, we could give firms an incentive to slow job destruction.”

The call is timely. Even as the nation’s unemployment rate fell to 9.7 percent last month, the number of long-term unemployed — those without work longer than 27 weeks — jumped to a historic high. Economists are projecting not only that unemployment will rise later this year, but also that it will remain above 8 percent even two years from now — higher than the peak jobless rate in either of the last two recessions.

Hassett pointed out that the job numbers coming out of the Labor Department each month are net figures reflecting the difference between the millions of jobs created and the millions of jobs lost — a constant churning that he says represents a vital opportunity for lawmakers interested in reducing unemployment.

“There is already a massive amount of job creation out there,” he testified. “If we can slow job destruction even a little bit, then we will have set the stage for big increases in net job creation.”

Reducing involuntary job losses by 10 percent, Hassett estimates, would be the equivalent of adding 200,000 jobs a month to the economy. Job-sharing policies in Germany have kept unemployment rates steady, Hassett said, even while that country’s GDP has tanked almost as drastically as that of the United States. And an additional perk: job sharing would be particularly beneficial to black workers, Hassett said, for the simple reason that blacks are often the first folks to be laid off in tough economic times.

Congress is paying attention. Financial Services Chairman Barney Frank (D-Mass.) called Hassett’s proposal “very useful.” Rep. Maxine Waters (D-Calif.) offered to give him an extra five minutes to testify. And Rep. Mel Watt (D-N.C.) called job sharing “a wonderful idea.”

“I turned to my staff and said, ‘Go draw me a bill that will do this kind of sharing, if nobody else has introduced that bill,” Watt said.

Turns out, the legislation is already out there. Bills sponsored by Rep. Rosa DeLauro (D-Conn.) and Sen. Jack Reed (D-R.I.) would provide more money to the 17 states already operating job-sharing programs, while offering additional funds to other states that choose to adopt similar initiatives. The White House, Baker said in a phone interview Wednesday, is supportive, though officials there seem intent to let Congress design its own jobs legislation.

Not everyone, though, is on board. Republicans, claiming that the first stimulus hasn’t done anything to help the economy, are near-united in opposition to another large spending bill — regardless of what it contains.

“I’m really surprised that we’re even debating the need for a new stimulus in light of our experience with the old stimulus,” said Rep. Spencer Bachus (Ala.), senior Republican on the Financial Services panel.

Rep. Jeb Hensarling (R-Texas) agreed, arguing that the Democrats’ $787 billion stimulus bill was “a complete failure.”

“I’m not even sure that John Maynard Keynes would have [supported] that particular stimulus program,” Hensarling said. “And here we are contemplating another one.”

Testifying before the House panel Tuesday, Mark Zandi, chief economist at Moody’s Economy.com, carried another message, warning lawmakers that current interest-rate and deficit-spending levels leave policymakers will few remedies should the country slip back into recession. With that in mind, Zandi urged panel members “to be aggressive” in crafting more stiumulus measures.

“If we have another recession, we will have no policy response,” he said. “We have to err on the side of doing too much.”

House Speaker Nancy Pelosi (D-Calif.) and Senate Majority Leader Harry Reid (D-Nev.) (WDCpix)

The failure of Washington lawmakers to recognize the severity of the Great Recession has slowed the recovery and allowed unemployment to reach double-digit levels, according to some of the nation’s leading economists. The experts hope that the latest effort — in the form of a new “jobs bill” being crafted by Democratic leaders — will not only be sizable enough to tackle the problem, but also will focus only on programs providing the most “bang for the buck.”

“In retrospect, they were overly optimistic,” Dean Baker, co-director of the Center for Economic and Policy Research, a liberal policy group, said of the previous efforts to stimulate the economy. “They just didn’t appreciate the severity of the downturn. … Even now, they don’t seem to get it.”

[Congress1]Not that lawmakers don’t have some practice at the sport. In February of 2008, with the nation’s unemployment rate at 4.9 percent, President Bush approved $168 billion in direct, $600 tax rebates — much of which, the experts suspect, taxpayers saved rather than spent.

One year later, with unemployment tickling 8 percent, President Obama took a $787 billion stab at the same problem. Many economists maintain that Obama’s stimulus has been heroic in preventing the economy from tanking even further than it has over the past year. Yet, with unemployment now hovering at 10 percent, they also contend that there is plenty of room for Democrats to improve their stimulus design.

“It is doing what it was intended to do,” said Heidi Shierholz, economist at the Economic Policy Institute, a liberal analysis group. “It just wasn’t big enough. … At the time, we were losing 700,000 jobs a month. There was definitely [the thought that] this $800 billion is not going to do it.”

Also, Shierholz conceded, “There was stuff in there that just wasn’t that efficient as far as spending goes.”

An example, economists say, was the nearly $70 billion to prevent the Alternative Minimum Tax, or AMT, from hitting millions of middle-class Americans last year. That provision might have helped to solve a political dilemma, but it did little to help the ailing economy.

“That crowded out useful stuff,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities, a liberal policy group.

Desmond Lachman, economist at the conservative American Enterprise Institute, was less enthusiastic about last year’s stimulus bill, saying that lawmakers “botched” the effort by allocating too much money to pork-barrel projects sought for political reasons, not economic ones. Now — as Democrats are eyeing yet another large spending package in hopes of curbing the still-rising jobless numbers — Lachman suggested they focus on projects that would get the money out the door more quickly. “You can’t mess it up like you did the last time around,” Lachman said, warning that there’s still a threat the country could slip back into recession.

There were other dubious elements of the $787 billion stimulus bill, economists say. Several billion dollars, for example, went to spur home sales by providing first-time homebuyers with a generous tax credit. Baker, of the Center for Economic and Policy Research, said that provision might have caused a temporary spike in the housing market, but likely won’t increase sales in the long run.

“If you get them to buy in 2009,” Baker said of homebuyers, “that means they’re not going to buy in 2010, or even 2011.”

Yet another stimulus strategy tried by Congress allows businesses to recoup taxes paid in recent years to make up for losses suffered in the recession. Yet research conducted by Mark Zandi, head economist at Moody’s Economy.com, indicates that the so-called “loss-carryback” strategy returns only 21 cents to the economy for every dollar spent by the federal government.

“As far as bang for the buck goes, it’s about the worst you can do,” Shierholz said.

Instead, economists of all political stripes are urging Congress to provide more federal funding for food stamps and Medicaid, while extending unemployment benefits and health coverage under the COBRA program. A simple and well-tested economic rule all but ensures the success of that strategy: Give money to people with little of it and they’ll usually spend it in a hurry.

Indeed, Zandi estimates that expanding unemployment benefits returns $1.61 for every federal dollar spent; increasing food stamps returns $1.74; and direct aid to states — for things like keeping teachers and firefighters employed — yields $1.41.

Baker is also pushing the creation of a federal work-share program, under which employers could reduce the hours of workers rather than laying them off, and the government would make up the difference in lost wages. Workers win, under this plan, because they keep their jobs. Employers benefit because they don’t have to train new part-time workers. And states stand to gain because the resulting payments would be less than the unemployment benefits they’d have to pay otherwise.

There’s some indication that Democratic leaders have already taken some lessons from the shortcomings of the first two stimulus approaches — at least as it pertains to marketing their yet-unveiled bill. For one thing, Democrats have abandoned the “stimulus” label, referring to their latest push instead as the “jobs bill,” lest the public confuse the legislation with the Wall Street bailout.

And another: Democrats haven’t made any grand predictions about the effectiveness of the measure before they even know what’s in it — a departure from last year, when White House economists said the Democrats’ stimulus proposal would keep the nation’s unemployment rate below 8 percent.

“The president’s mistake, and it was a mistake, was to underestimate how bad the situation was we inherited under Bush,” Rep. Jerrold Nadler (D-N.Y.) said this week. “He should not have said that unemployment would peak at 8 percent.”

Indeed, the ink was barely dry on the bill when the jobless rate hit 8.1 percent.

Today, an odd group of liberal and conservative policy experts and prognosticators called on the Senate to mandate a Fed audit before appointing Bernanke to a second term.

“In the last two years, the Federal Reserve Board has lent several trillion dollars to banks and other private companies, financial and non-financial institutions through a series of special lending facilities,” the group wrote in a letter.

At this point, neither the public nor members of Congress has any information about who benefited from these loans, guarantees, and swap arrangements. There is no information available on the specific terms of the loans – the interest rate charged, the collateral posted, and whether or not they were repaid. There is no information available on how it was decided who would qualify for the Fed’s help and who would be denied assistance….

Without this audit, Congress lacks the information it needs to evaluate Mr.Bernanke’s performance. Therefore the Senate should delay action on Mr.Bernanke’s reappointment until an audit of the Fed’s books takes place, the results are made available to the Congress and Mr. Bernanke answers a serious inquiry into the actions he took.

Signing the plea were such liberals as Dean Baker, co-director of the Center for Economic and Policy Research, and Robert Borosage, co-director of the Campaign for America’s Future. The conservatives included Grover Norquist, president of Americans for Tax Reform, and Phyllis Schlafly, president of the Eagle Forum.

You don’t see these names on the same side of an issue all that often. Then again, it’s not everyday that you have federal officials spending trillions of taxpayer dollars and claiming it dangerous to tell anyone where they’re going.

A foreclosed home in Winchester, Va. (Jay Mallin/ZUMA Press)

Mortgage giant Fannie Mae’s recent announcement that it will give homeowners facing foreclosure the chance to stay in their properties as renters for as long as a year is the latest aggressive move by the government to help troubled borrowers and tenants avoid being evicted. But as past efforts to stem the foreclosure crisis have already shown, even well-intentioned programs haven’t managed to reach significant numbers of people in peril – meaning any new approach faces a tough road ahead.

[Economy1]Consider, for example, a new federal law approved in May that protects renters from foreclosure evictions by giving them the right to stay in their residences after foreclosure for 90 days or for the duration of of their leases. Despite the new law, some tenants aren’t getting notice of their rights and are simply moving out, housing advocates said.

The problem has been particularly widespread surrounding a provision in the law, called the Helping Families Save their Homes Act, that allows for borrowers with Section 8 affordable housing vouchers the option to also stay in their residences when their landlord is in foreclosure. Some tenants who call their state or local housing authorities in Massachusetts and Connecticut after a foreclosure eviction notice are mistakenly told they have to move, noted Judith Liben, a senior housing attorney with the Massachusetts Law Reform Institute, a nonprofit legal services advocacy group. Better training of housing authority staff would help fix the situation, she said.

“Even with well-intentioned policies, there’s a disconnect between a good idea put into law, and what really happens on the street,” Liben said. “We see that disconnect on the ground, all the time.”

Despite anti-foreclosure initiatives by the government and lenders, the housing crisis has continued to worsen. Foreclosure notices totaled a record high of nearly 938,000 in just the third quarter of this year, according to RealtyTrac, an online foreclosure database. The Center for Responsible Lending predicts a total of 9 million foreclosures by 2012. Vacant and abandoned foreclosed properties are adding to neighborhood blight problems. Renters increasingly have become caught as innocent bystanders, evicted often without notice when their landlord faces foreclosure.

The new federal protections are supposed to address that. But in some cases, tenants in foreclosed homes either can’t reach real estate agents in charge of selling the properties to let them know they want to continue renting, or they get incorrect information from agents and think their only option is to move out immediately, said Shelley White, litigation director at New Haven Legal Assistance in Connecticut. In some instances, law firms send misleading letters that imply a financial incentive to move, known as cash for keys, is a renters’ only option, she said.

“We’re definitely seeing a lot of problems with tenants that just get notes from Realtors that say the bank has foreclosed on your property, and it’s time to get out,” Wright said.

The difficulties in outreach to tenants comes as the government continues expanding options and assistance to borrowers and renters dealing with foreclosure. In addition to the new federal law, the Treasury Department plans soon to rollout its plan encouraging more short sales by offering financial incentives to lenders and borrowers. In a short sale, a homeowner sells his home for less than the amount owed on the mortgage, and lenders forgive the remaining loan balance.

Both Fannie and Freddie Mac earlier this year began allowing qualified tenants in foreclosed homes under their control to sign month-to-month leases. Freddie Mac also started offering former owners of foreclosed homes the month-to-month lease option. Last week, Fannie announced its new policy, which significantly expands on the idea, allowing some owners who didn’t qualify for a loan modification and can’t afford their mortgage  the option of staying on in their homes. The owner would voluntarily turn over the property to Fannie in a “deed for lease” transaction, instead of going through a lengthy foreclosure process. The former owners in exchange would be given the option to rent back their homes for at least a year. Unlike in a short sale, their credit is unlikely to take a hit because of the transaction. And even investors may be eligible, meaning they would turn over their properties to Fannie, but their tenants would have the option to remain.

“This is huge,” said Dean Baker, co-director of the Center for Economic and Policy Research, who proposed a similar own to rent idea when the financial crisis first hit two years ago.

Baker would prefer that Fannie’s new policy extend the the rent-back period even further, to five or 10 years. But, overall, Baker said Fannie’s program addresses the problem of growing numbers of vacant properties, and represents a shift to promoting rental policies as a foreclosure solution. “You’re guaranteed a year, and that gives you some stability and a chance to plan ahead,” he said.

He and others also described Fannie’s new program as a big step forward over some efforts currently in place to help renters in foreclosed homes.

Fannie Mae, for example, already gives renters in foreclosed homes the option to continue renting on a month-to-month basis, or to accept a cash for keys offer. According to Fannie’s data, the financial help has been a far more popular option. Since January, it has tallied 3,500 cash for keys agreements, and 300 signed leases. Fannie Mae spokesperson Amy Bonitatibus said the program was set up to offer both choices to renters. It is open to all tenants of Fannie Mae-owned properties, but she had no information on specifically how many tenants had been approached with offers.

The small number of leases signed isn’t really surprising, said Danilo Pelletiere, research director for the National Low Income Housing Coalition. The options to renters were offered post-foreclosure, by which time some tenants may have decided to make other living arrangements. Cash for keys can be a more attractive option than a month to month lease. The new federal tenant protection law also overlapped with Fannie’s program, so some tenants may not have felt a need to sign leases, he said.

Pelletiere and other advocates said they have much higher expectations for Fannie’s new approach for former owners. A deed for lease transaction can happen far more quickly than a foreclosure, and having a longer-term lease will be more attractive to many people. Fannie also has hired a national property management company to handle the new program, while its existing rental initiative for tenants uses local real estate agents and property managers.

“Because of the way it’s designed, it should do a much better job,” Pelletiere said. “That makes it much more likely that we’ll see a national response. It provides a way for Fannie to be proactive and to get to the property earlier. And it costs less than getting someone out of a home and foreclosing on them.”

Alan Mallach, a senior fellow at the National Housing Institute and the Brookings Institution, agreed. “What’s interesting will be to look at how many people this new policy affects,” Mallach said. “I think it will be significant.”

Pelletiere said he also found some encouragement in early results from Freddie Mac’s program earlier this year to rent back properties to former owners of foreclosed homes on a month by month basis. According to Freddie Mac’s figures, almost 12,000 units entered its portfolio of foreclosed homes between April and October. In 70 percent of cases, a borrower is working on a mortgage loan modification, leasing the home back, or accepting cash for keys. In another 27 percent of cases, the property was vacant by the time Freddie Mac took it over. In three to four percent of cases, an owner or renter faced eviction. Of those occupants who signed leases, two-thirds were owner occupants and one-third were tenants. Spokesman Brad German said he had no further breakdown of the numbers.

The long-held belief has been that owners would decline to become renters again, so having more owners than renters sign rental leases is an encouraging sign for Fannie’s new program, Pelletiere said.

Still, he and others noted the government wouldn’t be prompted to move toward a more aggressive rental policy if a greater number of loan modifications were successful. A recent report by the Congressional Oversight Panel for the government’s taxpayer-funded bailout program criticized the progress being made under the administration’s Making Home Affordable program, saying that in a best case scenario it would prevent fewer than half of expected foreclosures.

As foreclosure notices pile up, troubled tenants and borrowers don’t always understand they might be eligible for help, or they don’t know who to contact to apply for programs, or they just give up and leave upon a foreclosure – even in cases where they have new federal laws and programs intended to avoid evictions. To Liben, the Massachusetts housing attorney, one constant of the housing crisis has been that some people “get lost in the shuffle.” She’s waiting to see if that will finally change.