Category Archives: Annual Deficit

Going On a Short Vacation!

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I began this blog last November, right after the national elections, to promote my strong view that the United States is on a dangerous fiscal course, with an already enormous, and still rapidly growing, national debt.  After four years in a row of deficit spending exceeding $1 trillion per year, the current year’s deficit is projected to be “only” $640 billion.  Far too many people, including many of our national leaders, interpret this to mean that the problem is getting solved and so we can relax.  But the already accumulated $12 trillion in public debt will cost our economy $600 billion a year, a significant fraction of total revenue, in interest alone when interest rates return to their historical average of 5%.
This is just the tip of the iceberg.  Federal spending is out of control all across the board.  Entitlement spending on Medicare and Medicaid is growing at twice the rate of inflation and is an especially acute problem.  But progress here depends on figuring out how to get healthcare costs in general under control, a huge challenge.  The much reviled sequester is working but it’s not nearly enough by itself to get discretionary spending under control.
Four years after the end of the Great Recession the economy is still limping along at 2% GDP growth and 7.6% unemployment.  And this is after enormous fiscal stimulus (deficit spending) as well as quantitative easing by the Federal Reserve.  Current policies are not working.  What we need is broad based tax reform with lower marginal rates (offset by ending tax preferences) to stimulate business investment and the private risk taking which propels the economy and creates jobs.  And, of course, faster economic growth will also increase tax revenue and therefore lower the deficit, as well as boosting employment.
This is a brief summary of what I’ve been saying for the past eight months.  To me it just seems like simple common sense, but not everyone agrees!  At any rate I’ll be out of town for the next two weeks.  I hope to be able to make a few new posts while I’m gone.  Stay tuned!

Does the Economy Need More Spending Now?

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In today’s Wall Street Journal the economist Alan Blinder writes, “The Economy Needs More Spending Now”, that the tax hikes and spending cuts agreed to in January and before are reducing GDP growth by 1.5% – 2% annually.  Mr. Blinder claims that it would be easy to design a new fiscal stimulus package that adds 2% to GDP per year as long as it lasts.  He also claims that a fundamental change like tax reform might only add a much smaller .2% to GDP per year although this much smaller annual effect would repeat indefinitely and therefore eventually amount to a large cumulative effect.  This is a sensible argument as far as it goes but is incomplete.
In the last five years there has been almost $6 trillion in (deficit) stimulus spending, coupled with a $3 trillion quantitative easing program by the Federal Reserve.  This represents an unprecedented fiscal and monetary stimulus to the economy by the federal government.  And the result has been a tepid although steady 2% annual growth in GDP, much slower than usually follows a recession.
After all of this enormous stimulus, which is having only a meager effect, what makes more sense:  to try even more stimulus or to try something different?  What else is there to try?  Immigration reform will boost the economy by drawing our 11,000,000 illegal immigrants into the main stream economy.  Note that citizenship (amnesty) is not required to accomplish this, only legal status.  Also, requiring many people receiving welfare (food stamps, disability benefits, etc.) to work would boost the economy by increasing the size of the labor force.
Broad based tax reform, greatly curtailing most, if not all, tax preferences, would be so attractive that it should not be put on a back burner, as Mr. Blinder suggests.  In fact, completely repealing the ACA’s Employer Mandate, now that it’s been postponed for a year, would give a big boost to many medium sized companies for which required health insurance is a big impediment to growth.
The point is that there are many ways to boost the economy besides even more artificial deficit stimulus, whose effect would be at most temporary anyway, as Mr. Blinder suggests.  It really is important to shrink our still very large annual deficits down to zero fairly quickly so that we stop adding to the huge burden which we have already placed on future generations.  In other words, we can likely have stronger economic growth and fiscal restraint at the same time, the best of all possible worlds!

The Four Fiscal Fantasies

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Jon Cowan and Jim Kessler from the Third Way think tank have just written a new article, “The Four Fiscal Fantasies”, in which they address our country’s current fiscal situation from a point of view which is sympathetic to, but critical of, the left.

  • Fantasy #1:  Taxing the rich solves our problems.
  • Fantasy #2:  We can have it all.
  • Fantasy #3:  Waiting is benign.
  • Fantasy #4:  The politics get better.

These four fantasies are fairly self-explanatory.  The solution they propose for the long term insolvency of Social Security is an at least partial lifting of the FICA cap as well as chain-weighting of the CPI.  These are both good ideas.
Their solution to looming Medicare insolvency is to trim costs in the current program with, for example: bundled payments, medical homes for end-of-life, a permanent fix for the Sustainable Growth Rate (doc fix), reducing duplicative care, increasing provider coordination, etc.  This however is a band aid approach to getting Medicare costs under control.  We need far greater and more fundamental changes in our entire healthcare system, public and private.  Douglas Holtz-Eakin and Avik Roy have a plan to do this which I have discussed in my June 5, 2013 blog post, “Free Market Healthcare in America”.
With respect to discretionary spending in the federal budget, Mr. Cowan and Mr. Kessler propose several specific budget cuts in order to boost spending for other programs for kids, science, research, curing disease, infrastructure, etc.  Savings in one area would be spent on investments in other areas rather than being used for reducing the deficit.
To me this whole program represents a step in the right direction even though it does not come close to all of the changes that will be needed to shrink the deficit down to zero.  If national Democratic leaders would propose this sort of a program, it would force Republican leaders to take it seriously and would therefore break the current logjam in Congress.

Who is Responsible for the Sour Economy?

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In yesterday’s New York Times the columnist Ross Douthat with “The Great Disconnect” makes a good case that the Washington to Boston corridor, i.e. the national elite, is disconnected from America’s most pressing problems.  Instead of concerning themselves with jobs and the economy, healthcare costs and entitlement reform, fighting poverty and reforming the tax code, which are the real priorities of the American people, the issues getting the most attention by our national leaders are rather gun control, immigration reform and climate change mitigation which represent much lower public priorities.
Of course there is a political logjam between the two parties.  The Republicans want to use free market incentives to improve the economy such as tax reform and the elimination of onerous regulations.  The Democrats want more government stimulus which is controversial because it will increase the deficit.  As far as Mr. Douthat is concerned both parties are pretty much equally to blame for the stalemate because of their unwillingness to compromise in order to make progress on our biggest problems.
In a situation like this there is really only one person who has the clout to make a difference.  It is the President.  Presumably he is motivated to improve the economy more quickly because lack of progress will be a blot on his record and a drag on the chances of his party in the next presidential election.
The problem is that his liberal ideology, which got him elected and then re-elected, is at odds with the one single measure which would most improve the economy.  I am referring to pro-growth, broad-based tax reform where rate reduction and simplification would be offset revenue-wise by eliminating deductions and closing loopholes.  If such tax reform includes the elimination of the tax deduction for employer provided health insurance (again, offset with lower tax rates!), the cost of healthcare would drop dramatically as consumers started paying attention to their own costs.  Then Medicare and Medicaid could be brought into the same framework and presto, we have entitlement reform as well.
Republicans are strong advocates of tax reform.  It’s too bad that Democratic leaders can’t see how everyone, including themselves, would benefit from doing this!

Is America in Decline?

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A new book by the two economists Glenn Hubbard and Tim Kane “Balance: The Economics of Great Powers from Ancient Rome to Modern America” analyzes the decline of many of the great empires and civilizations in human history.  According to the authors, they all declined (or are now declining!) primarily for internal economic reasons rather than from external military threat.  The authors conclude that America’s own existential threat is fiscal.  Our lowest debt level in recent years was 23.9% of GDP in 1974 ($344 billion) which has climbed to 75% of GDP today ($12 trillion) and is predicted to keep growing worse in the years to come.
Our political system is too polarized to solve our huge debt problem.  Republicans want lower taxes; Democrats want higher spending.  If Republicans succeed in cutting spending, it upsets the voters and gives the Democrats an advantage.  If Democrats succeed in raising taxes, it upsets the voters and gives the Republicans an advantage.  So we end up with low taxes, high spending, fiscal imbalance and political stalemate.  This is the dilemma we are in.
But the authors propose a solution: a flexible balanced budget constitutional amendment where total outlays for a year do not exceed the median annual revenue collected in the seven prior years.  A three-fifths supermajority of each house of Congress can declare a one-year emergency exemption.  Additional one-year exemptions may be approved only by escalating votes in each house of Congress.  The amendment would take effect in the seventh year following ratification by the states.  During the seven year transition period the deficit would be reduced gradually each year until it reached zero.
Messrs Hubbard and Kane provide an excellent, nonpartisan analysis of the deep predicament in which our country now finds itself as well as an attractive means of extricating ourselves from this precarious situation.

The Folly of Paul Krugman

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In yesterday’s New York Times Paul Krugman has a column “Fight the Future” in which he says that “fiscal contraction” is “undermining what might otherwise have been a fairly vigorous recovery” and that  focusing on long run fiscal sustainability “isn’t a way of being responsible”.  He compares our fiscal problems with global warming and says that the “uncertainty about the impact of greenhouse gases on global temperatures actually strengthens the case for action, to head off the risk of catastrophe”.  But “delaying action on entitlement reform has no comparable cost”.  He even says that seeking a “grand bargain” that links reduced austerity now to longer-run fiscal changes is harmful because it would involve negotiating with untrustworthy Republicans!
First of all, there has been no real fiscal austerity in the past five years.  Federal expenditures took a huge jump from 2008 to 2009 and have increased each year since, in spite of huge deficits.  The sequester will not cut spending in 2013 compared with 2012 but only slow down the rate of increase.  There is little, if any, uncertainty about how fast the costs of healthcare in general, and Medicare in particular, will increase in the years ahead.  The current slowdown in healthcare costs in the last few years still leaves it growing at twice the rate of increase of GDP.  Demographics alone clearly show that the cost of Medicare will start increasing even more rapidly in just a few years from now.
Mr. Krugman concludes by saying that “influential people should stop using the future as an excuse for inaction.  The clear and present danger is mass unemployment, and we should deal with it, now.”  I basically agree with him!  The question is how!  Should we deal with it by artificial stimulation (bigger deficits and more debt) or rather by boosting the private sector with tax reform and strategic deregulation?  It takes two to tango and Mr. Krugman doesn’t help by constantly ridiculing the Republicans!

Looking for Help!

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America is in a tough position at the present time, both economically and fiscally.  Our economy is stuck in a slow growth mode of 2% per year, ever since the end of the recession four years ago.  The unemployment rate, now 7.6%, is dropping only very slowly which means many millions of people are either unemployed or underemployed.  Our national debt, now almost $17 trillion, is still growing rapidly.  As interest rates increase and return to normal levels, as they may be starting to do already, just paying the interest on this enormous debt load will take an increasingly large portion of government revenues in the years ahead.  At the same time entitlement spending, on Social Security, Medicare and Medicaid, is also increasing rapidly.  It is absolutely essential for our national leaders to strongly focus on finding solutions for these escalating problems and only a few of them, but not nearly enough, are making a concerted effort to do this.
I am trying to do something about these critical and urgent problems.  First of all, I challenged the incumbent Congressman for Nebraska’s Second District, Lee Terry, in the Republican Primary in May 2012, but to no avail as he was easily re-nominated and then re-elected in November 2012.
After the 2012 elections I set up a blog: https://itdoesnotaddup.com/ to address these critical national issues and to propose ways of addressing them.  There are over fifty individual posts by now which go into much detail on possible actions that could be taken at the national level to make more progress on all of these matters.  But I need to reach a wider audience and to create a greater sense of the eminent danger we are in if we don’t take our current situation more seriously.
I have employed a graphic designer to come up with a new and more exciting logo and website to hopefully create more visibility for what I am doing.  Take a look: http://thebudgetjack.com/.  I am also looking for one or more people to help out with new content for the new website.  Perhaps it could be authoring a separate but related series of blog posts on these same issues.  Or perhaps by contributing a new feature to the website which would never occur to me on my own.
If you have any ideas about any of these things, please let me know.  I am easy to reach at jackheidel@yahoo.com. I look forward to hearing from you!

After the Crisis: The Power Inversion and What It Means

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In today’s New York Times David Brooks has a column “The Power Inversion”  describing a shift of economic and political power from the federal government to municipal governments.  Of course, the rural to urban population migration has been taking place for many years.  But now the financial crisis and resulting political stalemate in Washington is causing civic leaders to take more initiative in addressing economic problems.  The Brooking Institution’s Bruce Katz gives many specific examples of such initiatives in a recent speech “After the Crisis: The Metropolitan Revolution”.
This shift of power away from Washington and back to local government could have big ramifications for the federal budget which, as almost everyone knows, is currently running huge deficits.  Here is a good example to start with.  The U.S. Senate is about to take up revision of the No Child Left Behind law which expired several years ago.  A bill, Strengthening America’s Schools, has been introduced by the Democratic majority for this purpose.  It allows states to create their own education reform plans and sets testing and performance standards for all states to follow.  It is much more flexible than NCLB.
Congress should take this opportunity to reorganize the federal Department of Education by greatly consolidating its huge number of individual programs (over 100 separate programs in K-12 education alone).  Support for state education programs could be given in much larger chunks thereby giving states and school districts more leeway in figuring out the best way to divide up and allocate their education dollars.  The total federal budget for education could be significantly reduced in this way and the states will, at the same time, be able to do a better job with fewer dollars because there will be fewer strings attached.
This is a smart way to shrink the federal deficit and we should take advantage of it!

Is Medicare Out of the Woods?

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The Medicare Trustees have just released their annual report and, according to today’s Wall Street Journal, “Medicare Trustees’ Report Eases Concerns on Funding”.  In 2012 Medicare expenses, most of which are paid out of general government tax revenue, amounted to $574 billion, up 4.6% from 2011.  Although this is a smaller annual increase than usual, it still represents a rate of growth which is much too fast to be sustainable over the long run.  After all, the economy (i.e. GDP) is only growing at a rate of 2% per year and so a rate of 4.6% for Medicare is more than twice as fast as the economy is growing.  Such a rapid rate of growth for Medicare has been going on for many years and simply cannot be continued much longer.
The problem is that Medicare is an open ended entitlement program which pays whatever is needed by its currently 50.7 million retired enrollees, whose number is also increasing rapidly.  The only way that Medicare can possibly survive indefinitely is to be turned into a defined contribution program whereby each enrollee’s annual support is limited to a fixed amount.  Of course, this places responsibility on each enrollee to pay attention to the cost of her/his own medical care.  This is a big change from the present system of government responsibility and so it will take a major change of thinking to make such a big switchover.  But a new system can be phased in over time so that everyone can get used to it.
We really only have two choices.  We can postpone any action along these lines until the cost of the current system is so outlandish that the government is given the authority to severely ration healthcare for senior citizens.  The alternative is to set up, and phase in, a new system so that every enrollee bears responsibility for the cost of her/his own care.  Right now we have the luxury of deciding which of these two systems we want to adopt.  But if we put off the choice much longer, it will be forced upon us by financial necessity.

A Frightening New Look at the U.S. Debt Problem

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Let’s take another look at the Congressional Budget Office’s “An Analysis of the President’s 2014 Budget”.  On May 18, I pointed out that his budget projects a deficit of “only” 2% ten years from now in 2023, which amounts to a $542 billion deficit in that year, quite a large amount.
There is actually a clearer and rather frightening way to look at the continuing buildup of debt over the next ten years according to the President’s budget.  On page 4 of the CBO report, year by year projections are given for each of the following: Debt Held by the Public (on which interest is paid), Gross Domestic Product, Net Interest on the Public Debt, and Net Interest as a Percentage of GDP.  The actual amounts for 2012 are: $11.3 trillion in Public Debt, $15.5 trillion GDP, $220 billion Net Interest and 1.4% Net Interest/GDP.  These figures all steadily increase during the next 10 years with projected values for 2023 being: $18.1 trillion in Public Debt, $25.9 trillion GDP, $782 billion Net Interest and 3.0% Net Interest/GDP.
Here’s what is so frightening.  Right now we’re paying 1.4% of GDP as debt interest but GDP is itself growing at about 2%.  So we at least have a small net growth of .6%.  But the 1.4% interest for 2012 and 2013 is projected to keep growing steadily and reach 3% in 2023 and then to continue on growing indefinitely after that.  This means that either our growth rate continues to steadily increase and hits at least 3% by 2023, and then still goes even higher after that or else our economy will begin to stagnate and go backwards.
We are currently on a perilous course, caused by the enormous accumulation of debt over the past few years, on which we will have to pay interest in perpetuity.  It is an urgent matter to rapidly shrink deficit spending way down close to zero in the next few years.  We need to find more effective ways to boost the economy than the excessive public stimulus which has put us into this dreadful current situation.