One Cheer for the Trump Budget Proposal

As the readers of this blog are well aware, I believe that the rapidly accumulating national debt is by far the biggest long term problem our country faces.  While I am in general optimistic about the future of our country, I am pessimistic that our debt crisis can be solved in a planned and rational manner without going through another huge financial crisis.

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Simply put, fixing a debt problem requires a bipartisan solution, and, at the present time, our broken political system makes it all but impossible to find any kind of consensus short of having a national crisis.  The only way to fix the debt is to get entitlement spending under control (see the first chart).

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The Trump budget for 2020 projects a deficit of $1.1 trillion or 4.9% of GDP which is way too large.  Nevertheless it does at least make some attempt to control both Medicare and Medicaid spending as the second chart shows.
The budget also takes a whack at various governmental departments and agencies (see third chart).  Such whacks at discretionary spending do little to reduce the annual deficit (which will still amount to $1.1 trillion) but are beneficial to force the federal government to operate more efficiently.

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Unfortunately the final budget for 2020, after approval by Congress, is likely to project an even larger deficit than the $1.1 trillion projected by Trump.  This is because Congress is likely to insist on more discretionary spending than Trump proposes.

Summary: The Trump budget proposal at least takes a few small steps towards controlling entitlement spending as well as making cuts in discretionary spending.  Unfortunately even these relatively modest spending curtailments are unlikely to survive Congressional action.

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Why It Will Be So Difficult To Fix Our National Debt

This blog deals primarily with fiscal and economic issues.  Overall I am a political moderate but I am a hardcore conservative on our national debt.  It is in very bad shape as I have said over and over again:

  • First of all, our debt is now at 78% of GDP (for the public part on which we pay interest), the highest it has been since right after WWII and is predicted by the Congressional Budget Office to keep getting worse. Right now interest rates are so low that it is almost free money.  But when interest rates go up, as they will eventually, interest payments on the debt will skyrocket and create a huge fiscal burden for the United States.  The longer this takes to happen, the greater our debt will likely become, and so the eventual interest payment problem will have gotten that much worse in the meantime.
  • The only way to fix the debt is to either raise taxes and/or curtail spending on entitlements, by far the biggest and fastest growing budget item. Either of these approaches requires sacrifice by large numbers of people and therefore is difficult to achieve politically in the best of circumstances.                                  Capture9
  • And now we have the worst of circumstances! Our political system is deadlocked  with both sides trying to destroy the other side.  Any move by either party to either raise taxes and/or curtail entitlement spending will be strongly attacked by the other side.  The attached graph shows that polarization and debt level go hand in hand.  In other words, our rapidly worsening debt level is a symptom of our ever increasing political polarization.

Summary.  Our large and rapidly growing national debt is a very serious and urgent problem.  It requires a bipartisan solution which will be very hard to achieve in our current deadlocked political system.  It is difficult to be optimistic about addressing this problem effectively in the current environment.

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Why Our Country Is So Starkly Divided

Although Donald Trump’s election as President in 2016 was a fluke in the sense that the three purple states of Wisconsin, Michigan and Pennsylvania barely carried him over the finish line with a total three state margin of just 77,000 votes, it also reveals the stark division of our country into red and blue pieces (see first map):
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  • As of the November 2018 national elections, 30 states (see second map) now have both legislative chambers controlled by Republicans, 19 states have both controlled by Democrats and only one state – Minnesota – has a split legislature. (Nebraska, the only state with a unicameral legislature, is in the Republican group.)
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  • We’ve known for some time that the red–blue divide is to a large extent rural–urban, with minorities, who usually vote Democratic, packed into cities while Republicans are more evenly spread out and thus dominate the rural areas.
  • Would you rather drive a Prius or a pickup truck? Would you rather eat meatloaf and mashed potatoes or chicken curry and vegetable biryani?  According to the authors of Prius or Pickup, how you answer these questions reveals a lot about how you vote!
  • The political analyst, Christopher DeMuth, distinguishes between the elite “anywheres” who are not especially tied down to any one particular geographical location and the less educated “somewheres” who are more likely to live where they grew up. The “anywheres” are well educated, articulate and mobile and well positioned to influence the administrative state and the judiciary.  The “somewheres” are more beholden to their congressional representatives for political support.  As the federal government grows ever bigger and more complicated, and Congress willingly forfeits more of its power to the administrative state, the influence of the elite “anywheres” is strengthened at the expense of the non-elite “somewheres”.

The less educated, more rural “somewheres” are revolting and have, for example, demanded restrictions on immigration and foreign trade which they see as threats to their traditional way of life.  This has turned them into avid supporters of Donald Trump who has adopted their wishes as a major part of his agenda.

Summary.  The nationalism springing up all around the free, democratic world is a natural reaction by the non-elites to the increasing complexity of modern society and the growth of government to deal with this increasing complexity.

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The Jungle Grows Back

Every once in a while I read a book which is so compelling that I want to tell everyone about it.  The last one was “The Hundred-Year Marathon” by Michael Pillsbury which reveals “China’s secret strategy to replace America as the global superpower.”

Now I want to tell you about “The Jungle Grows Back” by Robert Kagan.   It describes the crucial role of America in our imperiled world.

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Several authors such as Johan Norberg, “Progress“, Steven Pinker, “Enlightenment Now”,  and Matt Ridley, “the Rational Optimist”, describe the steady human progress of the last several hundred years such as the increase of personal freedom, equality, and longevity and the decrease in poverty and violence all around the world.  These remarkable trends are widespread and have made the world a much better place.way&sr=8-2

Mr. Kagan makes a strong counter-argument that “this story of human progress is a myth.”  He argues that the amazing progress of the past 75 years is the product of a unique set of circumstances.  Namely that “the most powerful nation in the world since 1945 has been a liberal democratic capitalist nation.  The question is not what will bring down the liberal order but what can possibly hold it up?  Today there are signs all around that the jungle is growing back.”

“Prior to WW II democracy was in decline and it had been virtually nonexistent over the preceding five thousand years.”  Since 1945 it is “the growing power and reach of the liberal world order which is unprecedented.”

“We have lived inside the bubble of the liberal world order for so long that we have forgotten what the world ‘as it is’ really looks like.  In the American-led liberal order, Russia has fallen from superpower status but China has risen towards it.  If the United States is strong and determined and the liberal order remains healthy and united, a Chinese challenge could fail.”

But the “liberal world order may no longer be healthy enough and coherent enough to continue containing and discouraging” Chinese ambitions.

The biggest question of all concerns America’s own commitment to the liberal world order.  We have to abandon the post-Cold War myth that liberalism must be the natural end point of human evolution because it triumphed over communism.

“Today the order remains intact despite the hostility of the present administration and the weakness of the last.  It is ultimately the American security guarantee, the ability to deploy hard power to deter and defeat potential aggressors that provides the essential foundation without which the liberal world order could never survive.”

In summary, “the liberal world order is as precarious as it is precious.  It is a garden which needs constant tending lest the jungle grows back and engulf us all.”

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Prosperity Requires Economic Growth

Many authors have pointed out recently that the world is gradually getting better in the sense that world-wide poverty is steadily decreasing.  The primary cause is the steady economic growth which has taken place ever since the beginning of the industrial revolution in the late 1700’s.

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Faster economic growth means that more workers are needed to perform the necessary labor to produce the growth.  This in turn means that the unemployment rate goes down and wages go up as employers have to compete more vigorously to hire the available workers.
The eternal debate about the best way to increase growth has flared up again recently as Amazon has decided to back out of its plan to create 25,000 new jobs in New York City because of local opposition.

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Some people say that the best way to bolster workers and the middle class is to increase minimum wages and to provide free college and federal job guarantees.
The problem is that before jobs can be enhanced with a minimum wage or hiring guarantees, for example, the jobs have to exist in the first place.  It is true that some jobs are created by government investment but this requires spending tax dollars which are usually in short supply and have to be spent carefully and efficiently so that voters won’t object to paying them.
In our free enterprise system most jobs are in the private sector.  This means that the best way to create more jobs and better paying jobs is to encourage entrepreneurs to start new businesses and existing companies to grow and expand.  Let the market determine pay levels and job conditions with minimal government interference.
In turn, the best way to help workers at the lower end of the pay scale is with the already existing Earned Income Tax Credit which provides a wage subsidy for many workers. This government program could easily be expanded to help even more low-income workers.
Summary.  The best way to address income inequality in American society is by encouraging more economic growth in the private sector and then expanding wage subsidies to apply to all workers in the lowest wage categories.

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Why Our Debt Is Such a Serious Problem

My last several posts have discussed some of our society’s biggest problems in terms of their relative seriousness and how likely we are to make progress in solving them in the near future.  For example:

  • Global Warming. The evidence for man-made global warming is overwhelming (shrinking arctic sea ice, rising sea levels, more intense hurricanes, more devastating forest fires, etc.).  But a growing number of Americans (now 70%) agree that urgent action is needed to address global warming and our political system is already responding on a state and local level.  The Republican Party is already starting to get the message.
  • Stagnant Middle Class Incomes. How to boost incomes for the working class is now a hot political issue.  Do we need faster economic growth or more redistribution or a combination of the two?  My own answer is to push for more inclusive economic growth by enhancing the Earned Income Tax Credit with a Wage Subsidy to give a bigger boost to all working people at the lower end of the income scale.  The EITC already subsidizes wages to some extent and there is bipartisan support for expanding this program.

But our national debt is continuing to get worse and worse with no plausible solution in sight.  The public debt (on which we pay interest) now stands at $16.6 trillion or 78% of GDP and is projected by the Congressional Budget Office to keep growing rapidly until serious reforms are undertaken.  The longer we wait the more difficult the necessary corrective actions become.
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For example, CBO predicts that our annual deficits will settle down to an average of about 4.4% of GDP from 2019-2029 (see chart). At the same time GDP from 2020-2029 may only average 1.7%, much too low to keep up with the larger deficit levels.  In addition the net interest rate on the debt will likely increase to 3% by 2029. (see chart).

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All of this adds up to a spectacular debt increase over the next 30 years (see chart) which will almost certainly produce a severe fiscal crisis long before we reach the end of this time period.

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What makes this problem so difficult is that neither political party wants to address it seriously because it can only be done by raising taxes broadly or curtailing entitlement spending.  Both alternatives require sacrifice on a large scale which is difficult to accomplish politically.
Stay tuned for more details on what to do!

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An Economy That Works for Everyone

As I remind my readers, I am a non-ideological fiscal conservative and social moderate.  I am a strong supporter of economic growth as measured by GDP.  GDP growth hit 3% in 2018 for the first year time since 2005, helped out by both recent deregulation and the tax reform which lowered our top corporate rate to an internationally competitive 21%.

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But it is well understood that blue collar workers have not benefitted from recent economic growth as much as the most highly educated.  Many less skilled workers have been hurt by both globalization and the increasing automation of industry. The economic and social pain they are suffering has been especially well chronicled by the social scientist, Charles Murray, in his book, Coming Apart.

Globalization and automation are desirable trends in general because they are economically efficient ways of raising living standards worldwide. The question then is: what should the U.S. do to help those workers who have been left behind in the present job market?

The best existing program to do this is the so-called Earned Income Tax Credit.  It subsidizes low-income working families at an overall cost to the federal government of about $70 billion per year.  But is has several weaknesses.  It only applies to families with children so that many millions of individual workers are left out.  Furthermore it is only paid out once a year, at tax time, and therefore does not provide a steady stream of extra income.  Finally, the tax credit starts declining at an income of $19,000 for a married couple with two children, for example, and disappears entirely at $50,000.

A better plan has been proposed by Oren Cass in his recent book, The Once and Future Worker.  It is called a wage subsidy and applies to every worker who makes less than a target wage of, say $16 per hour.  It pays half of the difference between the actual wage and the target wage.  For example, if a worker makes $10 per hour, then his employer pays him/her an extra $3 per hour and deducts the $3 from his tax payment to the federal government.  This approach ties redistribution directly to productive employment and therefore is superior to other types of such programs.

It would cost the federal government $200 billion per year, much more than the current EITC program costs.  The additional $130 billion cost could be transferred from the $1 trillion per year now spent on federal welfare programs without hurting the poor.

Mr. Cass’s proposal is founded on the principle that “a labor market in which workers can support strong families and communities is the central determinant of long-term prosperity and should be the central focus of public policy.”

The wage subsidy program would be a giant step in this direction.

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