Monthly Archives: February 2013

Updated Simpson Bowles Plan versus the February 2013 CBO Report

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Erskine Bowles and Alan Simpson have just released an updated version of their two year old plan to bring our national debt under control.  The new plan is called A Bipartisan Path Forward to Securing America’s Future.   It is very worthwhile to compare their new plan with a recent Report from the Congressional Budget Office.

Bowles and Simpson propose additional deficit reduction of $2.4 trillion over 10 years (which includes the $1.1 trillion in the sequester cuts currently scheduled to take effect on March 1, 2013).  This would have the effect of reducing the national debt from its current level of 76% of GDP in 2013 to 73% in ten years.  The CBO report presents three different scenarios.  Their middle route would require an additional $2 trillion in deficit reduction over and above current law (i.e. assuming  that the $1.1 trillion in sequester spending cuts will take place as scheduled).  This CBO middle route would reduce the Debt/GDP ratio to 67% by 2023.

In other words, for an additional deficit reduction of $700 billion over ten years, we’ll get an additional 6% of Debt/GDP reduction.  These numbers have huge practical significance.  Simpson-Bowles says that we need an additional $1.3 trillion in deficit reduction over and above the sequester cuts, which presumably will soon be enacted,  just to stabilize the national debt over a ten year period at the historically very high level of 73% of GDP.  That’s $130 billion a year for ten years.  Many people are complaining about the approximately 5% cuts in discretionary spending which will be required by the sequester.  But just to stabilize, not really shrink, the Debt/GDP ratio over ten years will require more than twice as much deficit reduction as the sequester.

To even mildly shrink the Debt/GDP ratio to 67% by 2023 will require yet an additional deficit reduction of $70 billion per year.  In other words, we will essentially have to triple the size of the sequester effect in order to achieve real debt reduction over ten years.  And all of this assumes favorable economic conditions such as steady growth and continued low inflation.

Do our national leaders have the will to do what should be easily understood as needed by anyone looking at the numbers with any degree of objectivity?  Let’s hope so because the future of our country depends on it!

The Connection between Business Investment and Unemployment, Revisited

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In my previous post I discussed the very close inverse relationship between business investment and unemployment pointed out by John Taylor in his February 4, 2013 blog entry.  Paul Krugman pointed out that that investment can be subdivided into residential and nonresidential components and that residential investment shrunk dramatically during the Great Recession.  According to Krugman, this invalidates Taylor’s conclusion that the best way to boost the economy is to boost business investment.

But Taylor has done further analysis which shows that it is the nonresidential component of total fixed investment which has the very close inverse relationship with unemployment, not the residential component.

In other words, the best way to boost the economy, and thereby increase employment, is to stop giving excuses for our slow recovery because of low housing prices and to motivate businesses in general to increase investment.  There are various ways to do this, as pointed out by many commentators including myself and, the important thing, is to increase movement in this direction.

The Connection between Business Investment and Unemployment

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The Stanford economist, John Taylor, has pointed out in the February 4, 2013 entry of his blog, Economics One, the strikingly close correlation between business investment and the national unemployment rate. His graph shows that since 1990, whenever business investment increases, then the unemployment rate starts to fall with only a short time lag.  And, vice-versa, when business investment starts to fall, then the unemployment rate starts to increase.

It seems like plain common sense, then, that a very good way to boost the economy and thereby create more jobs, is to figure out how to motivate businesses to increase their rates of investment.  One way to accomplish this is to let businesses speed up their tax deductions for capital investment.  Of course, the best way of all would be to completely eliminate the corporate income tax.

Approximately 10% of federal tax revenue comes from the corporate income tax.  This amounts to roughly $250 billion per year.  Such a loss of federal revenue could easily be balanced by closing loopholes and deductions for high income taxpayers.  Such a shift in federal taxation would provide an enormous boost to the economy.

Making our economy grow faster is the key to solving both our very serious economic (putting people back to work) and fiscal (shrinking our federal deficit) problems.  Any and all ways to get this done should be the top priority of our national political leaders.

The Stark Budget Choices Now Before Congress

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The Congressional Budget Office has just released a new report, “Macroeconomic Effects of Alternative Budgetary Paths” concerning several decisions which Congress will have to make in the very near future, pertaining to the sequester budget cuts of $1.1 trillion over ten years, approving a budget for the remainder of the current 2013 fiscal year and raising the federal debt limit.

The first page of the CBO report conveys the basic message with a single graph.  If the sequester is cancelled and there is perhaps even additional deficit spending in the near term, it will give the economy a small boost in 2014 but cause a drop in GDP of close to 1% by the year 2023.

If the deficit is decreased by an additional $2 trillion over 10 years, beyond the spending cuts required by the sequester, the economy will take a small hit in 2014 but will receive a boost of close to 1% by 2023.  An additional deficit reduction of $2 trillion over 10 years, will cause a greater immediate hit to the economy but produce a much more substantial boost of almost 2% by 2023.

An excellent summary of the CBO report, including political implications, is given by the Wall Street Journal on February 6, 2013.  For example, it is the last scenario above, an additional $4 trillion deficit reduction over ten years, which would put the US on a path to achieve a balance budget by 2023.

Under current law, with no additional deficit reduction in the future beyond the sequester which takes effect on March 1, the annual deficit will shrink for the next three years but then resume a steady climb back to $1 trillion by 2023 and the publicly held national debt will climb from its current level of 73% of GDP to 77% of GDP by 2023.

The choice now before Congress is thus very clear:  should we continue kicking the fiscal can down the road, as the Keynesian economists want to do, or should we bite the bullet, take a small immediate hit to the economy, and thereby put the future of our country on a sound financial basis?

To me the answer is clear as clear can be.  But it will require our national leaders to stand up and be counted.  Do enough of them have the political courage to do what needs to be done?

Why $16 Trillion Only Hints at the True U.S. Debt

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In an Op Ed article last fall in the Wall Street Journal two former Congressmen, Chris Cox and Bill Archer, point out that the total US government debt, now over $16 trillion, is only a fraction of the total unfunded liabilities of the government, which now exceed $87 trillion.  The unfunded liabilities represent future expected payments for Social Security, Medicare benefits for currently employed workers as well as current retirees and also the future retirement benefits of current federal employees and retirees.

If this enormous sum of already obligated future payouts is not bad enough, even scarier is the rate of growth of these unfunded liabilities.  In calendar year 2011, the accrued expense was $7 trillion, double the entire current revenue of the federal government of about $3.5 trillion.  In other words this awful problem is getting much worse every year.

The House Republican majority is trying to address our almost incomprehensibly bad debt problem.  Will they be able to generate enough public support to force the Senate and the President to take the problem seriously?  Right now the odds do not look very good for effective action to be taken.  An enormous crisis is almost on our doorsteps.  How bad will it have to get before public opinion demands action?  It is very hard to remain optimistic about the future of our country when we appear to lack the collective will to take the action which is so obviously needed