Whitney says the “similarities between the states and the [investment banks before the financial crisis] are extreme, to the extent that the states have been spending dramatically, growing leverage dramatically. [Municipal] debt has doubled since 2000, but spending has also grown way faster than revenue.”

From 2000 to 2008, states’ tax revenue increased 45 percent, but spending increased 60 percent. To finance the difference — as all states save for Vermont are required to run balanced budgets — politicians used off-balance-sheet vehicles, reduced transfers into pension funds, and borrowed against future revenue. “You borrow from future dollars to benefit the present. Basically generational robbery,” she says. “The bonus [for the government officials who did it] is to get reelected.” (She notes that the ratings agencies were totally out to lunch on this.)

In fiscal-year 2011, states will be $121 billion in the red, and there won’t be any more federal stimulus dollars to make up the difference. That means they will have to lay off more workers and cut more services. But Whitney does not think the states will default on their debt, as the federal government will step in to help.

Cities and towns are in the same dire straits as states, facing widening budget gaps as stimulus dollars dry up. In some cases, state houses will step in to help local governments — as happened with, for instance, Harrisburg, Pa., which needed state dollars to meet a debt payment. But state houses will not be able to fully backstop cities and towns — as also happened with Harrisburg, facing bankruptcy. Defaults and other debt-payment problems mean investors won’t touch municipal bonds — meaning cities can no longer issue bonds to make up their budget gaps.

That leaves only a few other crummy options for cash-strapped cities and towns: Defaults and bankruptcies, tax and fee increases, the sale of public goods, and austerity budgets, slashing funding for street lights, elementary schools, police, mental-health services, libraries, sidewalks, etc.

The question I have is whether states can tackle this problem now rather than later — assessing local budgets and working with the federal government to figure out how to stave off utter budgetary catastrophe.

“This country is about to face a massive wave of layoffs in our schools and institutions of higher learning that could weaken our economic recovery and cause serious damage to our education system,” Harkin said in a statement. “This bill is an investment in our kids, in our economy and in our future.

“Recent headlines make the case that two pillars of the American dream — a good job and a good education — are at risk for millions upon millions of our citizens. At this point in our fragile recovery, we need to put Americans back to work educating the next generation, and that’s what this bill does.”

The House plans to take a similar measure up this week in a supplemental appropriations bill, mostly filled with war-funding measures. The House actually already approved the measure in December, as part of a jobs package now stalled in the Senate. Senators are expected to return to the measure this week (but not before Tuesday’s primaries) and they are expected to pare it back to win over the votes of centrist Democrats worried about deficits.

This is just one worrying instance of the federal government possibly wavering or pulling back on offering benefits to keep state workers employed and other forms of stimulus. Democrats killed a $24 billion state aid package in the House. The extension of COBRA health benefits for the unemployed might be at risk, as might the Doc Fix for Medicare.

As Ezra Klein*, Matthew Yglesias and Stephen Gordon explain, keeping up state employment is important as a form of stimulus. And pairing reductions in state spending due to the recession with increases in federal spending for stimulus, there has not been an expansion in government spending over the course of the recession.

For more good reading on the wave of coming layoffs for teachers, see Seyward Darby’s new piece in The New Republic on the possible ill effects of last-in, first-out provisions.

*Full disclosure: Ezra is my “unmarried domestic partner,” in the romantic phrasing of the Census.

But, he said, “If we have any advantage over China, if we have any advantage over India, it’s that we’ve got somebody from everywhere here, and they do well.” Saying that the country “still works for immigrants,” he went on to explain:

The real reason there’s anti-immigration sentiment is that it’s white, male factory workers without a college degree that got killed in the last decade…. The burdens of the last decade’s economic downturn were on white male high school graduates, or non-high school graduates, or [people with] a couple years of college, who shivered in this economy. Their taxes would be lower if we got more taxpayers…. The pressures on social security and the changes we have to make will be less draconian if there’s more people in the system. I don’t think there’s any alternative but for us to increase immigration. We can start [to increase immigration] at the areas at the top and the bottom [of the earnings spectrum] that will not displace people who are the most insecure [jobs-wise]. I don’t see any way out of [the fiscal crisis] unless that’s part of the strategy.

Last week, the Obama administration started reaching out to Sen. Scott Brown (R-Mass.), presumably in an effort to woo him as a swing vote for immigration reform. Senate Majority Leader Harry Reid (D-Nev.) and the White House hope to move on immigration reform sometime this year.

Rep. George Miller (D-Calif.) (Bob Larson/Contra Costa Times/ZUMA Press)

As Capitol Hill Democrats consider proposals to pull the country out of its huge deficit hole, they’re repeatedly running into a formidable impediment: themselves.

On issues as diverse as health care and student lending, provisions designed to rein in deficit spending have all run smack into the ubiquitous inclination of lawmakers to protect their home turf from the scalpel of budget cuts. Their message is familiar: Congress must do something to get its fiscal house in order, just don’t do it in my back yard. And party affiliation is largely irrelevant.

[Congress1] The most recent case surrounds a popular proposal to eliminate government subsidies to private companies that lend to students. The legislation, which has already passed the House and enjoys enthusiastic support from President Obama, would save the government tens of billions of dollars over the next decade — most of which would go toward expanding scholarships for low-income college students. Never an overly partisan issue, it was proposed by President Bush several times during his tenure. Senate Democrats are hoping to attach the legislation to their sweeping health care reform proposal.

Not so fast.

Those billions of dollars don’t go nowhere. And six Senate Democrats — Bill Nelson (Fla.), Blanche Lincoln (Ark.), Ben Nelson (Neb.), Mark Warner (Va.), Jim Webb (Va.) and Tom Carper (Del.) — voiced their objections to the proposal on Tuesday. The lawmakers — most representing hubs of large, private lenders — say they support student loan reform “to generate historic budget savings,” but have concerns that the White House proposal “could put jobs at risk.” They’re asking Senate Majority Leader Harry Reid (D-Nev.) to approach any action “in a thoughtful manner that considers potential alternative legislative proposals.”

Though short on specifics, the message is clear: The lawmakers want to rein in spending, but not if it threatens jobs in their states.

It’s an argument that’s applicable to almost every budget reform lawmakers tackle. That is, even if some industry, or project, or siphon of federal spending is utterly wasteful — even if it’s utterly pernicious — it’s still likely that somebody’s livelihood depends on it, and therefore someone in Congress is going to defend it. (Some examples include the fights over dropping the F-22 fighter jet; canceling the presidential helicopter; and forcing the automakers to keep dealerships around even if they weren’t selling cars).

In a more recent case, the Senate, as part of its health care bill, included creation of an independent commission empowered to recommend Medicare pay reforms if Congress didn’t do enough to control program costs. The recommendations would take effect unless Congress voted them down. Yet House Democrats are balking at the idea. Rep. Mike Capuano (D-Mass.), for example, sent a letter to supporters Thursday, saying he’s worried that the panel’s recommendations “would quickly and inevitably result in Massachusetts losing tens of thousands of jobs and would seriously undermine one of our region’s economic engines.”

“Other regions with heavy concentrations of health care would feel a similar impact,” he wrote.

Such resistance highlights the question facing leaders on Capitol Hill as they try to rein in federal deficits: How does Congress “generate historic budget savings” when thousands of jobs likely hinge on the spending?

The question is timely — and not only because the country is in the middle of a jobs crisis. The nation’s budget deficit hit $1.4 trillion last fiscal year and is on pace to top that figure this year. Much of that spending represents emergency measures enacted to address the recent economic downturn, the worst the country has suffered since the Great Depression. Yet even absent those temporary measures, federal spending remains on an unsustainable course, with Medicare and Medicaid alone threatening to swamp the federal budget in a few short decades.

Aiming to maximize tax dollars, the House passed a bill in September that would eliminate the Federal Family Education Loan program, or FFEL, under which the government subsidizes private lenders that cater to students. Instead, all loans would originate directly from the U.S. Treasury, though private lenders would still compete to service those loans. The Congressional Budget Office has estimated that the provision to eliminate the for-profit middle man would alone save the federal government $67 billion over the next decade. The bill’s sponsor, Education and Labor Committee Chairman George Miller (D-Calif.), told reporters at the Capitol Thursday that the current system represents “a titanic boondoggle in excess subsidies to some of the nation’s rich and most powerful banks.”

Banks, he could have added, that employ large numbers of folks in a large number of states.

The regional protectionism is hardly limited to Democrats. When the White House last month proposed to cut an expensive defense contract in Alabama, for example, GOP Sen. Richard Shelby (Ala.) was quick to retaliate, placing a hold on every Obama nominee before the Senate. When President Bush vetoed a $300 billion farm bill in 2008 — citing taxpayer subsidies to wealthy farmers — it was Sen. Saxby Chambliss (R-Ga.), among other farm-state Republicans, to rally the successful override. The list goes on.

Joshua Gordon, policy director for the Concord Coalition, a budget watchdog group, said the FFEL debate mirrors that over Medicare Advantage, the program under which private companies cater to Medicare patients. Each program represents “a system that everyone knows is inefficient,” Gordon said, but reforms have gone nowhere in Congress, largely due to the local interests of some members.

The reluctance of Congress to make difficult budget decisions, Gordon added, only bolsters the argument for an independent deficit commission “empowered to think of the country on the whole and not just individual districts.”

Then again, in bipartisan fashion, the Senate shot down such a proposal last month.

“There is one thing that often unifies Congress,” Gordon said, “and that is irresponsibility.”

Don’t hold your breath. Proving that their calls for bipartisanship are bunk, GOP leaders are already lashing out at the possibility that the commission would recommend that someone, somewhere pay higher taxes. “Americans know our problem is not that we tax too little, but that Washington spends too much,” Senate Minority Leader Mitch McConnell (R-Ky.) said yesterday in a statement. (That’s the same Mitch McConnell who once called a deficit commission “the best way to address the [budget] crisis,” then voted against the proposal anyway.)

That’s also the message coming from the headliners at CPAC this week. Florida GOP Senate candidate Marco Rubio yesterday told the conservative faithful assembled in Washington that his plan for balancing the budget features an across-the-board tax cut, including an abolition of taxes on capital gains, dividends and interest.

“While we’re at it, let’s eliminate the one on death, too,” he said.

The implication from McConnell, Rubio and a host of others is that they can slash federal revenues and balance the budget by simply taking a hatchet to government programs. They must have forgotten what happened when the White House recently proposed to cut some spending in GOP Sen. Richard Shelby’s Alabama. Or the Republican outcry that accompanied the Democrats’ proposal to cut some payments to the private insurance plans operating under Medicare. Or the inconvenient fact that conservative states have historically received a good deal more federal funding than their residents have paid in federal taxes.

Into this picture, enter Alan Simpson, former GOP senator from Wyoming. Simpson — who, along with University of North Carolina President Erskine Bowles, will head Obama’s deficit commission — told PBS NewsHour’s Judy Woodruff yesterday that those who think deficits can be controlled solely with spending cuts are, well, dazed and confused. From the transcript:

Woodruff: Some people, mainly Republicans right now, are arguing, what’s really needed are tax cuts, that, even if it raises the deficit in the short term, that this would get government out of the way of business, business could grow, and the deficit will take care of itself.

Simpson:  Well, I’m not smoking that same pipe. …

Everything is on the table.  But, if we’re just going to use flash words like cutting children’s benefits or cutting veterans or raising taxes, it will be a tougher struggle.

Everything is out there.  We [know] how people use emotion, fear, guilt, and racism.  I have been through that old stuff with immigration. … I don’t use those.  I use facts.  And we’re going to do a lot of facts.

Whether facts mean anything in an election year is another question altogether.

Unfunded tab of government liabilities projected to reach $53 trillion over next 75 years. (flickr)

Think the $700-billion bailout package was expensive? Well, you ain’t seen nothin’ yet.

Over the next few decades, promised federal spending threatens to drown the economy to a degree that would make the recently enacted financial bailout plan seem cheap, David M. Walker, the former comptroller general, said Wednesday. Including Medicare, Social Security, veterans programs and myriad other financial obligations, the tab over the next 75 years is projected to reach $53 trillion — with a “T.” All unfunded.

Yet despite this projected gaping hole in the budget — one that threatens to consume all the economy in just a few decades — Congress has shown little appetite to rein in spending. While party leaders came together with startling urgency to pass the Wall Street bailout, they’ve done almost nothing to confront the much larger problem of the looming budget crisis.

Illustration by: Matt Mahurin

“That’s not just fiscally irresponsible,” said Walker, now president of the Peter G. Peterson Foundation, a group promoting fiscal sobriety. “It’s morally reprehensible.”

His thrashing — delivered during a gathering of leading economists in Washington on Wednesday — comes during a dark time for the nation’s economy. Risky, mortgaged-backed securities have collapsed in value, leading to a freeze in the flow of the cheap credit that fuels businesses. The freeze has destroyed storied investment firms, bankrupted others, sent home prices plummeting further and foreclosure rates leaping. On Wall Street, stock prices are in a tailspin; on Main Street, unemployment is rising, and no one seems to know when it will end.

In a coordinated effort to make that day come quicker, the Federal Reserve, in coordination with central banks around the world, lowered interest rates half a percentage point Wednesday. The Dow Jones Industrial Average responded with an upward blip, but ended the day down 189 points.

Many experts, including Walker, agree that Congress had to do something to re-instill investor confidence in the financial system. But the bailout, the former comptroller general is quick to point out, constitutes less than 1 percent of the country’s long-term spending obligations.

“My question,” he said, “is when are they going to start dealing with the bigger problem?”

There is good reason for Walker’s alarm.

The nation’s mandatory spending commitments — a combination of interest on the debt and entitlement programs that run on autopilot — account for more than 62 percent of the federal budget, up from 33 percent 40 years ago. And they’re climbing.

The oldest baby boomers will become eligible for Medicare in a few years, adding to the burden. More important, medical inflation is a force unto itself: Medicare alone is projected to grow at three times the rate of the rest of the economy over the next 25 years.

To slow that growth, Congress would have to pass legislation. Yet the surest reform options — raising taxes or cutting benefits — are both political landmines. Lawmakers don’t want to be remembered for doing either.

Walker claims there are “disturbing parallels” between the current financial mess and the nation’s looming budget crisis. Many Wall Street decision-makers, for example, who made out handsomely from their high-risk investments have never been held to account, even as thousands of homeowners have suffered from their choices. In Congress, Walker points out, lawmakers are often rewarded with reelection for their overspending, rather than being punished for tipping the nation’s balance sheets off-kilter.

Another example: Wall Street firms used off-the-books accounting to hide many dubious transactions from regulators. In Congress, the annual budget almost always buries real expenses — emergency funding for the wars in Iraq and Afghanistan, for example, and long-term obligations like Medicare — to create the illusion that overspending is less severe than it is.

In fact, Walker claimed, only two major differences distinguish the current financial mess from that facing the nation’s budget. First, the government crisis is far larger. Second, no one can bail out the U.S. government.

The lack of initiative among policymakers has caused some experts to question the quality of leadership on Capitol Hill. Tim Adams, a former Treasury official under the Bush administration who is now managing director of the Lindsey Group, an economic consulting firm, said the current financial crisis should be the country’s “call to arms to get our fiscal house in order.” To do it, though, the country needs strong leadership, “and right now we don’t have it.”

Election-year politics has contributed partly to Congress’s inaction. Without voters pushing for entitlement reform, few lawmakers have stuck their necks out to make it an issue. In this political environment, some experts say, change will come only when the public is better informed about the problems.

“It’s clear that our dysfunctional Congress is not going to act unless pressured by the voters,” said Rudolph Penner, a former director of the Congressional Budget Office who is now a scholar at the Urban Institute.

The entrenched partisanship of recent years hasn’t helped. With Democrats controlling Congress and George W. Bush occupying the White House, the environment in Washington has been one in which “winning is more important than governing,” according to Leon Panetta, former chief of staff for President Bill Clinton and now professor of public policy at Santa Clara University. As a result, entitlement reform has been close to impossible, even as experts have warned of looming trouble.

On Tuesday, that trouble become more pronounced when the Congressional Budget Office announced that the deficit for fiscal year 2008 (which ended Sept. 30) will be $438 billion — up $276 billion from the year before. In July, the CBO projected the 2009 deficit will reach $482 billion. That’s the largest dollar figure on record, though several deficits under President Ronald Reagan were far higher as a percentage of gross domestic product. The 2009 estimate does not consider the $700-billion bailout, so the real figure will likely top $500 billion.

Earlier this month, the federal debt hit the double-digit trillions — a figure large enough that Manhattan’s celebrated “debt clock” could no longer contain it. The mammoth sum has real budget implications: In 2007, the interest on the federal debt was $237 billion, or roughly 9 percent of the total budget.

Washington observers predict Congress will have to take further steps to treat the ailing economy. There remains disagreement, though, over what form another stimulus package should take.

A $56-billion proposal, passed by the House last month, would fund infrastructure projects, expand unemployment benefits and increase spending on such social services as Medicaid and food stamps. Senate Republicans defeated the measure. It’s unclear if Democratic leaders will try again when the Senate returns to Washington after the elections.

The next president will have no easy time inheriting the mess. Despite the claims of Sens. Barack Obama and John McCain, experts contend that many campaign-trail promises will have to be abandoned as a result of the current economic squeeze. “Most of their initiatives will not be able to be accomplished,” Panetta said.

Some economists are less pessimistic. Mark Zandi, chief economist of Moody’s Economy.com, maintained that, despite its troubles, the United States remains attractive in the eyes of foreign investors. As long as those investors continue to buy Treasury bills, he said, there’s reason to believe the recovery will come soon. “We are still the place you go when there’s a problem,” Zandi said, “even when the problem is here.”

Also a source of optimism, some experts predict that rebalancing Social Security will be easier in the middle of the financial crisis than it was previously. That’s because the major sticking point has been Republicans’ insistence that private accounts be included in any reforms — an insistence that seems absurd as the market continues its stunning fall.

“That’s not going to fly in this atmosphere,” said Alice Rivlin, former head of the Congressional Budget Office and now a Brookings Institution scholar. “Nobody’s going to turn their accounts over to Wall Street.”

As the economic debate rages, some observers see the financial trouble as an opportunity for everyone, not only Washington’s politicians, to try a hand at introspection. Adams of the Lindsey Group suggested the crisis has something to do with all Americans — eager consumers who bought things they didn’t need to fill houses they couldn’t afford.

“Maybe,” he said, “this is a period when we reconnect with what’s real in life.”

Right.

Last night, the Senate passed a modified version of the administration’s bailout, but not before they loaded it up with every bit of tinsel they could feasibly toss on.

This includes: billions in renewable fuel tax credits; billions in relief for families who would otherwise have to pay the alternative minimum tax next April; a tax credit for companies that promote bike commuting; a provision expanding insurance coverage for mental health services, and the list goes on. (Indeed, the original bailout bill was three pages long; the latest version is 451.)

Not that these things are necessarily bad policy steps — but of the $150 billion in new tax breaks, only $40 billion are offset (ie, this adds $110 billion to the country’s debt).

Those tax breaks are not a bad ploy for getting reluctant House Republicans on board. They, after all, were largely the reason a similar bill failed the lower chamber on Monday.

But it makes ridiculous those claims that the $56 billion House stimulus bill (think: Medicaid, food stamps, infrastructure and unemployment insurance) was a non-starter because, as the White House said in threatening a veto, it was too expensive.

Who said trickle-down economics died with Ronald Reagan?

The list of major subprime lenders for 2006 and 2007 resembles the casualty roster from the Battle of Verdun in World War I. Only difference: way fewer walking wounded this time.

Of the 30 biggest subprime home lenders in 2006, measured by dollar volume, 22 have gone bankrupt, shut down, been sold or been seized by Uncle Sam. Most of the survivors have scaled back.

I guess the warnings all those years from the housing and consumer groups who regularly testified before the Federal Reserve were right on the mark after all. Too bad no one ever listened. The only bright spot here: It’s not like we’ll miss any of these lenders.

RIP, subprime.

And remember about the door on your way out.

It was then that Walter Cronkite, the CBS news anchor who narrated the daily events for millions of people each night, called Vietnam “unwinnable.” In the White House, President Lyndon B. Johnson said, “If I’ve lost Cronkite, I’ve lost middle America.”

Now, we are in a different kind of war, one where U.S. financial insolvency seems at risk. Looking at this crisis, Sen. John McCain has said he would suspend his campaign. This included canceling an interview with CBS “Late Show” host David Letterman last night. Letterman said McCain was preparing to head to Washington in an effort to save the country.

The reaction was something the likes of which we’ve never seen.

A furious Letterman called out McCain and, without using the word “liar,” ran live feed of McCain preparing to do an interview with CBS News anchor Katie Couric at the precise moment he was taping.

In addition, Letterman lashed out at McCain’s decision not to have his running mate, Alaska Gov. Sarah Palin, take up the campaign slack while McCain was in Washington.

Letterman even suggested this was all linked to McCain’s recent fall in national polls. “When you call up at the last minute and cancel, that’s not the John McCain I know,” Letterman said. More than once he suggested that “something smells right now.”

Now, Letterman is no Cronkite. He’s not even Ed Sullivan.

But he is the face that millions of Americans see before turning in for the night. For years, McCain has appeared on his show, even announcing his intention to run for president on the program. And to have the affable Letterman visibly boil and go on the offensive showed that, perhaps, McCain, whose campaign has stumbled since the beginning of this economic crisis, is in bigger trouble than one would think.

Perhaps McCain won’t say, “If I’ve lost Letterman, I’ve lost middle America.” Does Letterman even say his audience is “middle America?”

But one wouldn’t be surprised if the Republican candidate began to smell a strong odor seeping into the vents of the Straight Talk Express.

Reason provides a summary:

You could ask the questions another way, and the second question doesn’t really apply to either candidate — they were talking about the crisis today, for example.

But the first read is that about one in 10 people agree with McCain. It simply doesn’t seem like presidential debates fit into the category of unreasonable political activity during a crisis.

It doesn’t look like the American people are with Sen. John McCain on this one.