Author Archives: jackheidel

How to Achieve a Balanced U.S. Budget

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President Trump’s proposed 2018 Budget lays out a plan to achieve a balanced budget over a ten year period. I strongly endorse this goal whether or not the Trump budget is a realistic way to get this done.
The virtue of the Trump budget is to tackle waste and inefficiency across many different domestic programs (see chart below).


Its main defect is that neither healthcare reform nor tax reform has yet been implemented and the cost and/or savings of these two major initiatives are not yet known.
In the meantime the only way to think about balancing the budget is conceptually in terms of how it might be done.  Barron’s economic analyst Gene Epstein has done this recently.


Mr. Epstein proposes:

  • $8.6 trillion worth of spending cuts over ten years, of which 40% would come from programs other than Social Security and healthcare. By achieving a balanced budget in ten years it would lower our public debt (on which we pay interest) from 77% today to 58% in 2027.
  • By raising the age limit for full SS benefits to 67 (already enacted) at a faster pace, and indexing initial benefits to price inflation rather than wage inflation, $200 billion can be saved over ten years. Another $300 billion can be saved by phasing in a 25% reduction in SSDI benefits.
  • Cutting the estimated improper payment rate for Medicare of 12.1% in half would save $400 billion over ten years. Raising the premiums for Medicare Part B and Part D to 35% of costs from the current 25% of costs would save $400 billion.
  • Another $600 billion would be saved by turning Medicaid into a block grant program to the states and giving the states much more flexibility in how it is spent.
  • $950 billion could be cut from the military budget by cutting back on overly expensive new weapon systems as well as closing unnecessary military bases, both foreign and domestic.
  • Many cuts in government subsidies to individuals and businesses would save $1 trillion. Grants in aid to sates could be cut by $500 billion.

Conclusion. There are many different ways to curtail federal spending. It has to be done and the sooner we get started the less painful it will be for all concerned.

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Objections to the Trump Budget

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President Trump’s budget for 2018 presents a plan to achieve a balanced federal budget in ten years, by 2027.  This is a highly desirable goal but there is much skepticism about whether or not his budget is realistic, see here and here.


My thoughts on this important matter are:

  • Fiscal restraint is a common sense necessity, and is not austerity. Our public debt (on which we pay interest) now stands at 77% of GDP, the highest since WWII, and will continue to increase without major changes in public policy. Right now the debt is almost “free” money because interest rates are so low. As interest rates inevitably go up in the near future, interest payments on the debt will skyrocket and become a huge drain on our federal budget and make annual deficits even worse than they already are.
  • 3% annual GDP growth, as assumed in the Trump budget, is almost certainly too optimistic. However the Trump Administration is on track to achieve significant deregulation  and averaging 2.5% growth over the next ten years is doable.
  • Insufficient entitlement reform is a big drawback for the budget. It will be very difficult, essentially impossible, to achieve and sustain a balanced budget without modifying Social Security and Medicare to make them self-financing. Turning Medicaid into a block grant program to the states would finally put Medicaid on a sensible budget.
  • Requiring able-bodied welfare recipients to work is a good idea and is the basis for cutbacks in social welfare programs.
  • The Departments of State, Interior, Education and Justice should be able to absorb cutbacks and operate more efficiently.

Conclusion. There are many good initiatives built into the Trump budget. Unfortunately there are also some invalid assumptions and glaring omissions.  It does not represent a bona fide plan to balance the budget in ten years but at least it recognizes the importance of doing so.

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Is Trump Serious about Shrinking the Debt?

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The newly released Trump budget for Fiscal Year 2018 claims that it will lead to a balanced budget in ten years.  This is a highly desirable goal.  However the projected $4.5 trillion in spending cutbacks for many popular programs, as well as the projected 3% GDP growth for the next ten years, are both unrealistically optimistic.  Nevertheless, at least the Trump Administration is moving in the right direction.


Here is a good summary by Donald Marron in National Affairs of why it is so important to keep deficits and debt under control:

  • Prolonged deficits and mounting debt will undermine economic growth by interfering with investment in the private sector.
  • Prolonged deficits risk fueling inflation as the government lowers the value of the dollar by printing more of them.
  • High levels of debt held by foreign lenders put us at the mercy of foreign countries.
  • The growing debt exposes America to greater “rollover” risk with the increasing reliance on short term debt which frequently has to be rolled over.
  • Rising debt limits flexibility for increased spending in times of recession or other emergency. For example, when the Financial Crisis occurred in 2008, the debt level was just half of its current level. This meant the government could risk higher deficit spending in order to stimulate the economy.
  • Deficits have an unfortunate tendency to feed on themselves. Our current deficit level of approximately $500 billion per year is so large that it can only be significantly reduced with great pain. The only possible way to make deficit reduction politically feasible is to spread this pain widely amongst the public as shared sacrifice. This will be very hard to do.
  • Deficits and debt are grossly unfair to future generations who are stuck with servicing the debt and/or struggling to pay it down.

Conclusion. The Trump Administration recognizes the strong need to get deficits and debt under control. Unfortunately its current budget just submitted is not a realistic plan to get this done.

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How Fast Can the Economy Realistically Be Expected to Grow?

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Both President Trump and the Republican Congress want the economy to grow faster than the slow 2% growth which we have experienced since the Great Recession ended in June 2009. The Congressional Budget Office predicts (see chart below) that growth will average just 1.8% over the next ten years under current policy.


The Committee for a Responsible Federal Budget, using CBO data, believes that several policy changes can help boost growth on an annual basis as follows:

  • Immigration reform, .3%, by increasing the number of workers.
  • Tax reform, .18%, if well designed. However, deficit-financed tax reform would ultimately harm growth.
  • Increase the Social Security retirement age by two years, .15%, by keeping people in the workforce longer.
  • Reduce deficits by $4 trillion over ten years, .1%. This is enough deficit reduction to put our debt on a sustainable, downward path.
  • Continue expanding energy production at the shale boom level, .09%.
  • Repeal of the Affordable Care Act, .08%, will keep more people in the workforce.
  • Ratifying the Trans Pacific Partnership, .01%, by increasing foreign trade.
  • Increasing public investment in infrastructure, education and research by $40 billion per year, .1%.

Note that all of these changes would increase growth by an estimated .83% of GDP per year. Added to the 1.8% base this yields a growth rate of 2.63%. Unfortunately, many of these reforms are unlikely to occur.  On the other hand, various deregulatory actions being taken by the Trump administration are likely to increase growth by an unknown amount.

Conclusion. It is reasonable to anticipate that growth can and will be speeded up to about 2.5% of GDP per year under the Trump administration.  Along with the tight labor market now developing (current unemployment rate of 4.4%), blue-collar and other middle class workers should continue to receive decent pay increases for the foreseeable future.

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How Donald Trump Could Redeem Himself

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From a reader of my blog:
I think he is too flawed, self-centered and sociopathic to accomplish much. I believe that tax reform will become tax cuts for the wealthy (no inheritance tax, etc.) and dealing with budget deficits will not happen. I know you think Trump will be contained by the conservative members of Congress. The Republicans seem unwilling to confront him or speak out as long as his base continues to be very loyal. I think he is so wounded now that it will be hard to accomplish much.


Granted that Donald Trump is hopelessly ensnared in controversy and incapable of changing his ways, he still has many opportunities to do something positive. For example regarding our extremely serious debt problem, he could focus on:

  • Coming up with a budget that reduces the debt path. No one expects the budget to be balanced in one year. Last year’s Republican plan would have taken ten years to get the job done. The important thing is to clearly move in this direction.
  • Focusing healthcare reform on cost control. Give the Democrats credit for expanding healthcare access with the Affordable Care Act. But now focus on reining in the cost of healthcare in America.

  • Enacting fiscally responsible tax reform. Most people agree that the tax code is a complicated mess and, especially, that the corporate tax rate is too high. There are many ways to achieve lower tax rates and simplification in a revenue neutral way.
  • Stop digging the debt hole deeper by just adding new initiatives. There will always be attractive new programs which are worth pursuing. But in adding them to the federal budget, other programs which are no longer effective need to be phased out.
  • Reforming entitlements such as Social Security, Medicare and Medicaid. These are the big drivers of national debt. Without entitlement reform, all other efforts to restrain federal spending will be insufficient.

Conclusion. There is nothing easy about pursuing the above agenda. Implementing it will be highly controversial with lots of vociferous opposition.  It will take strong leadership to push it through.  But it represents a huge opportunity for a controversial president to do something worthwhile.

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The GOP Needs to Get Healthcare Right This Time

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The Affordable Care Act expands healthcare access in the U.S. but does nothing to control its costs. With its current majorities in Congress as well as holding the presidency, the GOP now owns the healthcare insurance crisis.  If the GOP doesn’t get it fixed right, it is almost inevitable that we’ll eventually end up with a single-payer system such as universal Medicare.


I have previously discussed one good way to fix the bill recently passed by the Republican House of Representatives.  But today I will take a more general approach proposed by Thomas Miller from the American Enterprise Institute.  Mr. Miller says that a replacement for the ACA should emphasize:

  • Private markets rather than a bureaucratic system.
  • Positive incentives to obtain and maintain affordable coverage instead of mandates and ever-growing regulations to buy what you don’t want.
  • Decentralized decision making by patients, their representatives and state and local officials.
  • Lower taxes, higher value choices and clearer rewards for performing better, working harder and acting more responsibly.
  • Better targeted subsidies that will ensure generous protection of our most vulnerable Americans.

General principles such as these will end both the individual and employer mandates and allow average Americans a greater choice in how they want to spend their resources to protect and enhance their health.

Conclusion. The ACA has taken us closer to the goal of universal healthcare for all Americans and there can be no retreat from this standard. But much better cost control can be achieved and this is what fixing the ACA should focus on.  A free market system for healthcare will work if it is set up in a fair and responsible manner.

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The Modern Robber Barons

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I am a semi-retired mathematics professor (at the University of Nebraska at Omaha) who has developed a big interest in U.S. fiscal and economic policy in the past few years. In fact I write a regular blog on these issues.
I am currently reading the book, “American Amnesia” by Jacob Hacker and Paul Pierson.  Even though they are progressives, and I am a fiscal conservative, their presentation is sufficiently objective that I can learn a lot from it.  According to these authors, three of the biggest impediments to American progress are new robber barons in three parts of the American economy: health care, finance and energy.


For example:

  • The cost of health care. Why do Americans spend 18% of GDP on healthcare, both public and private, almost twice as much as any other developed country? It is because of the ability of medical professionals, health insurers, pharmaceutical companies and hospitals to charge high prices. Either we figure out how to control and limit medical costs or we will inevitably end up with a government run single payer system.
  • The financial industry. Large financial institutions hurt the economy because they can beget big financial crises. The Dodd-Frank Act has made large banks less likely to fail but is also a big burden for community and regional banks. The solution is to relax complicated regulations in favor of higher capital and equity requirements.
  • Energy. The authors point out that the world’s average temperature would rise by 16 degrees Fahrenheit if all fossil fuel resources on earth were consumed. Such a catastrophe is, of course, very scary but also highly unlikely. More and more Americans now accept that global warming is real. The best way to address it is with a (revenue neutral) carbon tax and it is likely that one will be adopted in the near future.

Conclusion. Health care costs, high finance and uncontrolled carbon emissions are indeed threats to our future prosperity. But, one way or another, we are on track to solve these problems.

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What Will Happen if We Have a New Fiscal Crisis?

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As I often remind the readers of this blog, the two main topics are what I consider to be America’s two biggest economic and fiscal problems:

  • Slow economic growth, averaging just 2% since the end of the Great Recession in June 2009. This means fewer new jobs and smaller raises.
  • Massive debt, now 77% of GDP for the public part on which we pay interest, the largest since the end of WWII and predicted by the CBO to keep getting worse. As interest rates rise from their currently unusually low levels, interest payments on the debt will skyrocket.

 

The first problem, slow growth, is being addressed by the Trump Administration with various deregulatory actions as well as likely tax reform action by Congress.  Furthermore, the current low 4.4% unemployment rate means that the labor market is tightening on its own.


The second problem, massive debt, is much more worrisome for the future.  Right now interest rates are so low that our entire debt is essentially “free” money.  But every 1% increase will add nearly $150 billion per year in interest payments.  And this continues indefinitely (and keeps getting worse with more debt) because debt is rarely if ever paid back, it is only rolled over!  What are the likely outcomes of such an upward spiral in interest payments?  There are two possibilities:

  • First, the unthinkable. We default on our debt. This would immediately end the role of the U.S. dollar as the international currency and end our superpower status. The fallout would be disastrous for world peace and stability.
  • Second, a huge tax increase. The only alternative to default will be a large tax increase just to keep afloat on interest payments. A likely new tax for this purpose is a consumption tax in the form of a value added tax.

Conclusion. It is extremely shortsighted to keep on delaying a necessary solution to our rapidly worsening debt problem. It’s going to be unpleasant to either cut back on spending or to raise taxes but the longer we delay action the more painful it will become in the end.  Isn’t it obvious that we should get started immediately?

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How to Improve the Affordable Care Act

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The Affordable Care Act, aka Obamacare, has dramatically expanded access to healthcare in the United States. But it has done nothing to lower the cost of healthcare  which now exceeds 18% of GDP and is steadily increasing.


Warren Buffett, the Oracle of Omaha, refers to medical costs as “the tapeworm of American economic competiveness.”
An excellent plan for improving the ACA, “Transforming Obamacare” has been put forward by the medical economist, Avik Roy.  It has five main features:

  • Repeals the individual mandate and proposes universal tax credits for acquiring catastrophic insurance and setting up health savings accounts.
  • Repeals the employer mandate and sets up a capped standard deduction for employer sponsored coverage.
  • Reforms Medicaid by migrating the current system into the above universal (and refundable) tax credit plan
  • Reforms Medicare by migrating the current program into the same universal system.
  • Other reforms for veterans, medical innovation, hospital monopolies, drug pricing and malpractice litigation.

According to Mr. Roy, the American Health Care Act, recently passed by the House of Representatives, does a good job in relaxing many of the ACA’s onerous regulations.  However it falls down badly by including a flat tax credit rather than a means-tested credit based on income. Such an approach means that millions of low-income Americans, either near retirement or just above the Medicaid cutoff, will be priced out of the insurance market.  This is what the Senate bill needs to fix.

Conclusion. Mr. Roy’s plan will not only expand overall healthcare access beyond the level achieved by the ACA but will also dramatically cut the cost of healthcare in the U.S. and even goes a long way towards achieving a balanced budget. Let’s hope that the Senate gets the AHCA proposal back on track.

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The Oracle of Omaha Speaks

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The annual shareholders meeting of Berkshire Hathaway Inc. was held this weekend in Omaha. More than 40,000 people attended.  Yesterday CEO Warren Buffett and vice chairman Charles Munger held a five and one-half hour question and answer session for the attendees.


Says Mr. Buffett as reported by the Omaha World Herald:

  • “We’ve got a big appetite for wind and solar projects.” BH Energy “borrows at taxable rates and Nebraska in terms of wind is not that much different than Iowa. We’re selling electricity in Iowa at lower rates than exist in Nebraska (with public power).”
  • Should BH keep working with Brazilian investors 3G Capital, known for slashing jobs at companies it invests in? Replied Buffett, “The gains in this world have come from gains in productivity. … This is why we live so well. … Government can put in place policies and programs that help workers left behind by economic shifts.”
  • “Trade, export and import, massive trade, should be and is enormously beneficial to the U.S. and the world.”
  • Medical costs are the “tapeworm of American economic growth. … Corporate taxes aren’t crippling but medical costs continue to rise. … The problem seems to transcend political party.”

Conclusion. Just these few remarks, among many others from the meeting, touch on several broad economic themes which I discuss on this blog.  Private enterprise is a powerful and efficient method of generating wealth for humanity.  Government should intervene to help those hurt by progress.  Renewable energy is profitable and here to stay.  Healthcare costs have a significant effect on business growth and need to be controlled.  Neither political party has a monopoly on the truth.

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