I am a candidate in the May 15 Nebraska Republican Primary for the U.S. Senate because the incumbent, Deb Fischer, is doing nothing about our enormous and out-of-control national debt. In fact, she has recently voted twice, for the new tax law and budget, to make our debt even worse than it already was. My last post quotes a reader of my blog as saying that deficit hawks need to make our soaring debt sound scary to ordinary citizens who don’t understand how it will affect their own lives.
The analyst Desmond Lachman from the American Enterprise Institute makes it sound even scarier by predicting a new 2008-2009 style crisis within the next year. According to Mr. Lachman there are two basic reasons to fear another full-blown global economic crisis soon:
First, we have in place all the ingredients for such a crisis. The housing price bubble before the 2008-2009 crisis has been replaced by a global asset price bubble, for both stocks and bonds. A second key ingredient is that the global debt-to-GDP level is significantly higher than in 2008.
Second, due to major mistakes by the Federal Reserve and the U.S. Administration, the U.S. economy is in danger of soon overheating, which will bring inflation in its wake. With very low unemployment, the Fed has let low interest rates linger for too long. And the U.S. economy has now received a double fiscal stimulus with unfunded tax cuts and a new two-year spending boost.
The Federal Reserve now has two unattractive choices. It can raise interest rates quickly and burst the global asset bubble, or it can proceed at a slower pace and ignore the very serious inflation risk.
Conclusion. With a very high and rapidly growing national debt, along with unusually low interest rates which will be pushed up soon one way or another, we should prepare ourselves for another crisis in the near future.
Six years ago I was a candidate for the Republican nomination for Nebraska’s Second District Congressional seat. I lost in the May 2012 Primary. After the November 2012 national election I began writing this blog It Does Not Add Up focused on fiscal and economic issues, mainly our large and rapidly growing national debt. I have now been blogging on this issue for over five years and the debt problem is just getting worse and worse. Here is where we are right now:
All 52 Republican Senators voted for the new tax law which, in spite of its beneficial tax reforms, adds $1 trillion to our debt over the next decade (after growth is taken into account).
The Congressional Budget Office projects our debt to grow by $11.5 over the next ten years. In FY2019, just one year from now, CBO projects the deficit will exceed will exceed $1 trillion and equal 4.7% of GDP. By 2047 federal debt will reach 150% of GDP, almost double the current 77%.
In our polarized Congress, Republicans insist on increasing defense spending, Democrats insist on increasing domestic spending and trying to put any limits on entitlement spending is very difficult. Republicans are willing to cut taxes but there is little enthusiasm for raising them.
The present stalemate will eventually lead to a new fiscal crisis, much worse than the Financial Crisis of 2008, without major changes in current policy. The thought of having to drastically cut many different spending programs in the middle of a huge fiscal crisis is horrifying.
Are there any alternatives? Calling a Constitutional Convention for balancing the budget, establishing term limits and/or limiting Congressional power (Convention of States), have created much interest but are long shots which may never happen.
Conclusion. Somehow or other we need to light a fire under enough members of Congress to persuade them to take our rapidly accumulating debt very seriously. Let me know (firstname.lastname@example.org) if you are willing to work with me to do something along these lines!
As the readers of this blog know very well, I am so upset about our rapidly increasing national debt that I am preparing (in just a few days) to enter the 2018 Nebraska Republican Primary for U.S. Senate against the incumbent Deb Fischer because she just voted (with the new tax law) to increase our debt by $1 trillion over the next decade. Of course, so did all of the other 52 Republican Senators as well but she is up for reelection this year and I live in her state.
The analyst Desmond Lachman from the American Enterprise Institute has a cogent summary of why increasing our debt at this time is such a bad idea:
With the public debt (on which we pay interest) at 77% the highest it has been since WWII, the U.S. already has a compromised debt position.
Basic principles of public finance suggest that when the economy is humming along (like now at 3% annual growth) and when unemployment is low (like now at 4.1%), one should try to reduce the public debt.
By having used up our fiscal space in good times, we run the risk of not having room to increase budget deficits in bad times.
The very low interest rates today (an artificial product of the Federal Reserve’s extraordinarily easy monetary policy over the past 8 years) are unlikely to last much longer and, in fact, the Fed has already started the process of raising interest rates, as inflation begins to heat up (see chart below).
Increased budget deficits make us increasingly reliant on foreign financing.
By our own sowing in joy with unfunded tax cuts, our children are likely to reap in sorrow the fruits of lower long-run economic growth.
Conclusion. By raising our debt by $1 trillion, the new Republican tax law is appallingly short-sited policy. I hope to make Senator Fischer pay a political price by her bad judgment in voting for it.
Not only is Washington politics already hyper-partisan, but both parties are continuing to move to even greater extremes, see here and here.
Here are two examples of extreme positions now being espoused by major elements of one or the other of the two parties:
Single payer healthcare. The failure of the GOP effort to repeal the Affordable Care Act this past summer means that (the goal of) universal healthcare is here to stay. The ACA expands access to healthcare but does nothing to control costs. Single payer, Medicare for All, would control costs but then we end up with socialized medicine. The only way to establish a cost efficient free market healthcare system is to remove, or at least limit, the tax exemption for employer provided care and to set up high deductible catastrophic care supplemented by health savings accounts to pay for routine expenses. This would compel everyone to pay close attention to the cost of their own healthcare.
Tax cuts instead of tax reform. Tax reform, i.e. lowering both corporate and individual tax rates, paid for by closing loopholes and shrinking deductions, is an excellent way to speed up economic growth and thereby create more and better paying jobs. But it is imperative to do this in a revenue neutral manner, i.e. without increasing our annual deficits. Our debt (the public part on which we pay interest) now stands at 77% of GDP, the highest it has been since the end of WWII, and is predicted by the Congressional Budget Office to keep getting larger without major changes in public policy.
Conclusion. The U.S. badly needs a more cost efficient healthcare system and a simpler and more efficient tax system. But there are right ways and wrong ways to do both of these things. Single payer healthcare and (unpaid for) tax rate cuts are the wrong way to proceed. In each case, no action at all is much better than getting it wrong.
Income inequality is a hot political issue today and I have frequently discussed it on this blog. In particular, the chart just below shows that income inequality is only slightly worse since 1979, after government transfers and federal taxes are taken into account.
The AEI scholar, Mark Perry, has analyzed the 2016 annual report from the Census Bureau on “Income and Poverty in the United States” and points out the very strong correlation between income inequality and household demographics.
The mean number of earners per household increases steadily from a low of .43 in the lowest income households to 2.04 in the top income households.
The marital status of householders. The share of married-couple households is only 17.3% in the bottom income quintile and then increases steadily to 76.5% for the top income quintile.
The age of householders. In the lowest income quintile only 42.4% of households included individuals in the prime earning years of ages 35-64, while 69.9% of households in the top quintile include individuals in this group.
The work status of householders. Only 18% of the lowest earning quintile households included an adult who was working full time, as compared to 77.7% of top earning households.
The education of householders. Only 14.6% of lowest earning households had a family member with a college degree and this percentage rose steadily to 64% for top earning households.
Conclusion. Household demographics are very highly correlated with household income. Specifically, high-income households have a greater average number of income-earners than households in the lower-income quintiles. Individuals in high-income quintiles are far more likely to be well-educated, married, working full-time and in their prime working years. It is also true that individuals and households can and do move up and down the income quintiles as these key demographic variables change.
As I have discussed previously, the evidence for global warming is overwhelming. I had hoped that President Trump would publicly recognize this scientific reality and decide to stay in the Paris Climate Agreement. Nevertheless, it will take more than three years for the U.S. to completely withdraw.
But in or out of the Paris Agreement, the best way for the U.S. to show leadership on this critical issue is to adopt a (revenue neutral) carbon tax. The American Enterprise Institute has just issued a comprehensive report on the desirability and feasibility of doing this.
Here is the gist of the AEI argument:
$40 per ton is often taken to be the social cost of carbon in the atmosphere. A carbon tax at this level would raise the cost of gasoline by 36 cents per gallon.
A carbon tax is a consumption tax. Taxing consumption rather than income promotes economic growth. The revenue neutral offset would likely be an income tax such as the payroll tax or corporate income tax.
A carbon tax need not disadvantage the U.S. globally since a border adjustment tax could be imposed on imports from countries without a carbon price regime.
Replacing arbitrary regulations. The primary carbon-reduction regulations currently in effect are the 1) Corporate Average Fuel Economy (CAFE) standards for vehicles and 2) Clean Power Plan which limits power-sector carbon emissions at the state level. Leaving carbon abatement decisions to carbon producers is far more efficient than leaving it up to regulators.
Growing public acceptance. 84% of registered voters, including 72% of Republicans, support actions to accelerate the development and use of clean energy. Even 49% of conservative Republicans say that “Americans will make major changes to their way of life to address climate change.”
Conclusion. For the U.S. to adopt a carbon tax would be an even stronger statement of world leadership than participating in the Paris Agreement.
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.