Our country faces two major fiscal and economic problems:
How to boost the economy in order to put more people back to work.
How to either increase tax revenue or better control spending in order to shrink the deficit.
My last post, “The Great Wage Slowdown and How to Fix It” makes a specific tax reform proposal to cut tax rates for all by shrinking tax deductions for the wealthy. This would put tax savings in the hands of millions of wage earners with stagnant incomes, who would likely spend it, thereby boosting the economy. As the above chart clearly shows, there is only one realistic way to shrink the deficit. We have to do a better job of controlling entitlement spending (Social Security, Medicare and Medicaid.) As a practical matter, this means we have to cut back the cost of American healthcare in general, both public and private.
The Manhattan Institute’s Avik Roy has come up with an attractive Plan for doing just this, “Transcending Obamacare.” Mr. Roy’s proposal is to:
Repeal the individual mandate. Insurers are encouraged to design policies of high quality tailored to individual need. By lowering the cost of insurance for younger and healthier individuals, the Plan will expand coverage without a mandate.
Repeal the employer mandate, thereby offering employers a wider range of options for subsidizing employees insurance.
Keep the exchanges to provide broad access as well as subsidies for those with low incomes.
Migrate the Medicaid population onto the exchanges.
Raise the Medicare eligibility age by 4 months per year indefinitely. Over time this will maintain future retirees on exchange-based or employer sponsored health plans.
By gradually moving the Medicaid and Medicare recipients onto the exchanges, both of these very large populations will receive equal quality coverage to everyone else, delivered in a cost effective manner. Mr. Roy estimates that the Plan will expand coverage by 12 million above Obamacare levels by 2025 and reduce the deficit by $8 trillion over 30 years.
This is the sort of major healthcare reform which we need to get entitlement spending under control!
Yesterday’s New York Times has an article “Battles Looming Over Surpluses in Many States”, pointing out that “unexpectedly robust revenues from taxes and other sources are filling most state coffers, creating surpluses not seen in years and prompting statehouse battles over what to do with the money.” For example, in Kansas, Governor Sam Brownback is calling for full day kindergarten for all students. This raises a larger issue. The states are recovering from the Great Recession and have lots of money. We know that states spend money far more efficiently than the federal government, because states have constitutional requirements to balance their budgets. On the other hand, the federal government is hemorrhaging red ink at a frightening rate which will just keep getting worse indefinitely until strong measures are taken. It has taken on far too many responsibilities and spends money very inefficiently.
All of this suggests an obvious course of action to turn around a very bad situation. We should devolve as many federal programs as possible back to the states. Here are three good ones to start with:
Medicaid costs the federal government about $250 billion per year with another $150 billion being paid for by the states. The problem is that federal support is a fixed percentage of what the states spend. This makes Medicaid a very expensive program with no limit on the cost to the federal government. A good way to solve this problem is to “block grant” Medicaid to the states and let each state figure out the best way to spend its own federal allotment. Annual increases in the size of federal block grants could be tied to the rate of inflation in order to limit their growth.
Education spending at the federal level is a $100 billion per year (not counting student loans) item. Just at the K-12 level alone there are over 100 individual programs to which states and school districts have to apply for funds separately. Wouldn’t it make far more sense to “block grant” education funds back to the states so that this large sum of money can be spent more effectively and efficiently by targeting it at the biggest needs in each state?
Job-Training costs the federal government $18 billion per year for 47 different programs. Again it would be so much more sensible to block-grant job training funds to the states and measure effectiveness by the number of workers hired.
There really are relatively simple ways for the federal government to operate more effectively and at much lower cost. We need national leaders who are committed to getting this done.
I have been writing this blog for just over a year. It addresses what I consider to be the two biggest problems faced by our country at the present time. First is our enormous national debt, now over $17 trillion, and the huge annual budget deficits which are continuing to make it worse. The second problem, of equal magnitude, is our slow rate of economic growth, about 2% of GDP annually, ever since the Great Recession ended in June 2009. These two problems are closely related. If the economy grew faster, federal tax revenue would grow faster and the annual deficit would shrink faster. Not to mention that a faster growing economy would create more jobs and lower the unemployment rate, which is still a high 7%.
The impediments to solving these problems are huge. Our public debt, on which we pay interest, is now over $12 trillion or 73% of GDP. Although it may stabilize at this level for a few years, it will soon begin climbing much higher, without major changes in current policy. This is primarily because of exploding entitlement spending for retirees (Social Security and Medicare) who will increase in number from about 50 million today to over 70 million in just 20 years. As interest rates return to normal higher levels, just paying interest on the national debt will become, all by itself, a larger and larger drain on the economy.
The impediments to faster economic growth are increasing global competition, such as inexpensive foreign labor, as well as rapid advances in technology, such as electronics and robotics. Both of these trends reduce the need for unskilled workers in America which in turn holds down wages and slows down economic growth.
At the same time we have an antiquated tax code to raise the huge sums of money necessary to pay for a large and complex national government. It worked fine through the post-World War II period, as long as the U.S. had the dominant world economy with little significant competition from others. But this situation no longer exists. We now have a tax system which doesn’t raise enough money to pay our bills and at the same time is so progressive that the highest rates (39.6% on individuals and 35% for corporations) are not sufficiently competitive with other countries. This discourages the entrepreneurship and business investment we need to grow the economy faster and create more jobs.
We have an enormous problem on our hands! Is it possible to fundamentally change our tax system to turn things around? My next post will answer this question in the affirmative!
Senator Tom Coburn of Oklahoma has an Op Ed column in the Wall Street Journal from two days ago “The Year Washington Fled Reality”, discussing many of the things that are wrong with our national government. Granted that all elected officials “play politics” to some extent or another, nevertheless Dr. Coburn, an obstetrician, is amazingly independent of the reigning political culture. He spent three consecutive terms in the House of Representatives, left Congress for four years, and now is back serving his second term in the Senate. He has announced that he will not run for re-election in 2016 when his present term ends. Dr. Coburn is constantly drawing attention to, and attacking, the enormous amount of wasteful and inefficient spending approved by Congress. The Popular Romance Project, pictured above, is an example. His office has just published its fourth annual report on government waste, “Wastebook 2013”, detailing 100 different “examples of government mismanagement and stupidity. … Collectively these cost nearly $30 billion in a year when Washington would have you believe everything that could be done, has been done to control unnecessary spending.”
Dr. Coburn has prevailed upon the Government Accounting Office to issue annual reports called “Actions Needed to Reduce Fragmentation, Overlap and Duplication and Achieve Other Financial benefits.” Three of these reports have now been issued. Altogether they list almost 400 individual actions which could be taken to improve the efficiency and effectiveness of 162 different program areas.
In spite of all the good work he is doing, Dr. Coburn would be even more effective if he had more help. Fiscal conservatives should stop wasting their time on senseless gestures like trying to defund Obamacare. They need to get down in the trenches with serious deficit hawks like Tom Coburn and whittle away at wasteful programs one by one.
Harvard Economist, Martin Feldstein, has an Op Ed column in yesterday’s New York Times, “Saving The Fed From Itself”, which gets our current economic situation half right. First of all, Mr. Feldstein says that the Fed’s quantitative easing policy is inadequate because “the magnitude of the effect has been too small to raise economic growth to a healthy rate. … The net result is that the economy has been growing at an annual rate of less than 2 percent. … Weak growth has also meant weak employment gains. … Total private sector employment is actually less than it was six years ago. … While doing little to stimulate the economy, the Fed’s policy of low long-term interest rates has caused individuals and institutions to take excessive risks that could destabilize the economy just as it did before the 2007-2009 recession.” So far he’s right on the button!
But then he goes on to say, “To get the economy back on track,” Congress should enact a five year plan to spend a trillion dollars or more on infrastructure improvement and that this would “move the growth of gross domestic product to above three percent a year.” An artificial stimulus like this might work temporarily but then it ends and we’re back where we started. We need a self-generating stimulus that will keep going indefinitely on its own. How do we accomplish this?
The answer should be obvious. We do it by stimulating the private sector to take more risk in order to generate more profits. In the process they will hire more employees and boost the economy.
How do we motivate the private sector? By lowering tax rates and loosening the regulations which stifle growth. Closing tax loopholes and lowering deductions (which will raise revenue to offset the lower tax rates) has the added benefit of attacking the corporate cronyism which everyone deplores.
We really do need to put first things first. If we can jump start the economy by motivating the private sector to invest and grow, we will have more tax revenue to spend on new and expanded government programs as well as shrinking the federal deficit.
Why is this so hard for so many people to understand?
An article in yesterday’s New York Times, “Detroit Ruling Lifts a Shield on Pensions”, reports a ruling by bankruptcy judge Steven W. Rhodes that Detroit “could formally enter bankruptcy and that Detroit’s obligations to pay pensions in full is not inviolable.”
The article goes on to say “that most here agree that the city’s situation is dire: annual operating deficits since 2008, a pattern of new borrowing to pay for old borrowing, miserably diminished city services, and the earmarking of about 38 percent of tax revenues for debt service. A city that was once the nation’s fourth largest has dropped to 18th, losing more than half of its population since 1950. The city was once home to 1.8 million people but now has closer to 700,000.”
The parallels and analogies between what has happened in Detroit and what is now happening in the U.S. are striking. The U.S. has had huge annual deficits for five years in a row and the accumulated debt is enormous, the Federal Reserve is holding interest rates down to make borrowing cheaper, and our country’s infrastructure is deteriorating much faster than it is being repaired.
Right now interest on the national debt is small ($223 billion in 2013, or 8% of federal revenues). But interest rates will inevitably return before long to their average historical rate of about 5%. Right now the public debt (on which we pay interest) is just over $12 trillion. This means that in the near future interest on the national debt will be at least $600 billion per year and probably much larger because the debt is still growing so rapidly. This will take a huge bite out of revenue and leave far less of it for other purposes.
This problem will continue to exist even if the budget were to be miraculously balanced from now on but it would at least lessen over time as the economy continues to grow. Without budget restraint the problem will never go away and will be a perpetual drag on our national welfare.
This is, of course, exactly the condition in which Detroit finds itself at the present time. Detroit has the option to declare bankruptcy and make its creditors and pensioners take big losses. Once it does this it can make a fresh start and perhaps recover its former status.
But are we prepared to let the whole country suffer a similar fate? The consequences would be enormous. If the U.S. goes down, the whole western world could come down with it. Democracy and human progress would be severely threatened. This is really too terrible a tragedy to even contemplate. Let’s turn things around before they get any worse!
After five years of enormous deficits, our national debt now stands at over $17 trillion. The only spending restraint that Congress has been able to achieve so far is an approximately one trillion dollar “sequester” over ten years, therefore amounting to about $100 billion per year in spending cuts. Federal expenditures have actually dropped for two years in a row now so the sequester really does work. Of course, almost everyone complains about cutting spending in such a “dumb” way. Why not make intelligent budget cuts by eliminating the least effective programs instead of having to make small percentage cuts in all discretionary spending, good and bad alike? Well, this really should not be all that difficult to do if Congress would try a little harder.
The Congressional Budget Office has just released a helpful report, “Options for Reducing the Deficit: 2014 to 2023”, which lists 103 ways for either decreasing spending or increasing revenues over the next decade. Amazingly, enacting all of these proposals would amount to a budget savings of $13 trillion over 10 years, ten times what is required by the sequester! Here are some examples of what could be done (along with the 10 year savings):
Eliminate direct payments to agricultural producers $25 billion
Increase federal insurance premiums for private pensions $5 billion
Reduce the amounts of federal pensions $6 billion
Tighten eligibility for food stamps $50 billion
Use more accurate measure of inflation for all mandatory programs $162 billion
Replace some military personnel with civilian employees $19 billion
Limit highway funding to expected highway revenues $65 billion
Eliminate grants to large and medium sized airports $8 billion
Eliminate subsidies for Amtrak $15 billion
Reduce the size of the federal workforce through attrition $43 billion
Tax carried interest as ordinary income $17 billion
Limit medical malpractice torts $57 billion
Raise the age of eligibility for Medicare to 67 $23 billion
Modify Tricare fees for working-age military retirees $71 billion
Total $566 billion
Right here is more than enough to offset half of the sequester. You don’t like these cuts? Then replace them with others from the CBO report. There are lots of options to choose from!
In yesterday’s Wall Street Journal, columnist William Galston writes “In Defense of Food Stamps” that “food stamps reach their intended targets, poor and near-poor Americans. The large increase in the program’s cost over the past decade mostly reflects worsening economic conditions rather than looser eligibility standards. Since 2000 the number of individuals in poverty has risen to 46.5 million from 31.6 million.”
Mr. Galston also states that “the number of able-bodied adults without dependents receiving benefits under the food stamp program has risen to nearly 5.5 million from under 2 million since 2008 even as work requirements for those individuals have been relaxed. Here the critics have a case: the federal government should reconsider the waivers of current requirements it has extended to 44 states and the District of Columbia and it should consider toughening those standards.”
Congressional Republicans have proposed cutting $40 billion from the food stamp program over 10 years, or $4 billion per year. Since the total food stamp budget is $80 billion per year, this amounts to a 5% cut. And this 5% cut is directed precisely at those 5.5 million able-bodied adults without dependents. Expecting these people to find a job, even if minimum wage, in return for receiving food stamps, is not asking too much. It is really just “tough love” more than anything else.
Putting a substantial portion of these 5.5 million able bodied adults back to work would also be a big boost to the economy. One of the biggest drags on the economy at the present time is the low labor participation rate which has dropped from about 66% to 63% since the recession began in 2008-2009.
Trying to make the food stamp program more cost effective is really just an example of what should be done across all programs of the federal government, routinely, as a matter of sound operating procedures. It is unfortunate that ideology and political partisanship get in the way of such common sense!
In yesterday’s Wall Street Journal columnist David Wessel responds too mildly in “Why It’s Wrong to Dismiss the Deficit” to Larry Summers’ view that we should not worry about the deficit. Mr. Summers says, “Let me be clear. I am not saying that fiscal discipline and economic growth are twin priorities. I am saying that our priority must be on increasing demand.” According to Mr. Wessel, here is the essence of Mr. Summers’ argument:
The deficit isn’t an immediate problem; growth is.
We’ve done enough (about the deficit) already.
The future is so uncertain that acting now is unwise.
Granted that the deficit for fiscal year 2013 is “only” $680 billion after four years in a row of deficits over a trillion dollars each and that interest rates are at an historically low level at the present time. The problem is that the public debt is now at the very high level of 73% of GDP and is projected by the Congressional Budget Office to continue climbing indefinitely. Interest on the debt was $415 billion for fiscal year 2013 which represents 2.5% of GDP of $16.8 trillion. With GDP growth increasing at about 2% per year since the end of the recession in June 2009, this means that interest on the debt is already slowing down the economy and it’s just going to keep getting worse as interest rates inevitably return to higher historical levels.
Growth is very definitely an immediate problem. But increased government spending is the wrong way to address it. The right way to address it is with broad based tax reform (lowering tax rates in return for closing loopholes) to stimulate investment and risk taking by businesses and entrepreneurs. Significant relaxing of the regulatory burden would also help, especially for the small businesses which are responsible for much of the growth of new jobs. So would immigration reform to boost the number of legal workers.
As uncertain as the future is, we can be quite sure that entitlement spending (Social Security, Medicare and Medicaid) will be going up fast in the very near future as more and more baby boomers retire and the ratio of workers to retirees continues to decline. It would be very risky indeed to assume that economic growth will increase fast enough to pay for increased entitlement spending.
Conclusion: large deficits are a very urgent and immediate problem which we ignore at our peril! Furthermore the best ways of boosting the economy don’t require increased government spending.
On page nine of today’s New York Times is published a full page letter to Congress and President Obama, “Enact The Inform Act”, signed by over one thousand economists as well as former government officials. It would require “the Congressional Budget Office, the Government Accountability Office and the Office of Management and Budget to do fiscal gap and generational accounting on an annual basis to assess the sustainability of fiscal policy and measure, on a comprehensive basis, the fiscal obligations facing our children and future generations.
“Unlike the measurement of the official federal debt, fiscal gap and generational accounting are comprehensive. They leave nothing off the books, be it defense spending, Medicare expenditures, or the profits of the Federal Reserve, in assessing the sustainability of fiscal policy and the size of the fiscal bills being left to our own children.”
The INFORM Act is sponsored by a nonpartisan and millennial driven organization which goes by the name, The Can Kicks Back . This is very significant because it is precisely the younger generation of Americans who should be most concerned about the fiscal irresponsibility of so many of our national leaders. They are the ones who will be stuck with the huge national debt which is being generated by the profligacy of federal spending and also the ones who may have their own retirement benefits greatly curtailed because of it.
Young people should be especially incensed by such irresponsible behavior which will affect them so greatly. We should support their efforts to turn around this ugly situation!