We Can Continue Borrowing Without Consequences. “Low interest rates are a temporary consequence of the struggling global economy and near term Federal Reserve actions – not a permanent fixture.”
There is No Harm in Waiting to Solve Our Debt Problems. “The longer policy makers wait to control debt, the more difficult it will become. For example, reducing debt to around the historical average of about 40% of GDP by 2040 would require tax increases or spending cuts of about 2.6% of GDP per year, if enacted today, or starting at $1,450 per person per year. Waiting a decade to begin would require adjustments of over 4% of GDP.”
Deficit Reduction is Code for Austerity, Which Will Harm the Economy. “Most advocates of fiscal responsibility in the U.S. have called for gradual reductions in long-term deficits so that the debt grows slower than the economy. These changes tend to have minimal near-term effects as well as the potential to significantly grow the size of the economy over the long term.”
We Can Fix the Debt Solely by Taxing the Top 1%. “The top 1% of earners, households that make at least $450,000 annually, earn a substantial share of national income, about 13% on an after tax basis, and further tax increases on this group could help. But these increases would need to be combined with reductions in spending growth and/or broader tax increases to fully address the nation’s fiscal challenges.”
Just a few days ago, I described a persuasive argument, “America’s Fourth Revolution,” that our hyper-partisan and dysfunctional political system will be unable to rectify our debt problem until we have another and much more severe financial crisis. The above discussion of budget myths from CRFB actually suggests a way forward to solve our debt problem.
We have a choice. Which path will we take?
The New York Times has a story today, “A Dirty Secret Lurks in the Struggle Over a Fiscal ‘Grand Bargain’”, suggesting that there are really two reasons why the House-Senate Budget Conference Committee, chaired by Representative Paul Ryan and Senator Patty Murray, is unlikely to accomplish very much. The simple reason is that the Republicans will not support tax increases, on which the Democrats insist, and the Democrats will not support major changes to entitlement programs, on which the Republicans insist.
But the “dirty secret” (according to the NYT) is that Republicans don’t really want to trim either Social Security or Medicare, which many Tea Partiers receive, and Democrats don’t really want to raise taxes on the upper income individuals who support them. Furthermore, the deficit for 2013 was “only” $680 billion, and is expected to drop further in the next few years, while interest rates are so low that borrowing hundreds of billions of dollars each year is not expensive. In other words, just kick the can down the road. Let somebody else worry about the problem in the future.
My previous post “Nowhere to Cut”, based on the report from the Congressional Budget Office, “Options for Reducing the Deficit: 2014 – 2023”, picks 14 possible budget cuts or revenue enhancements out of a total of 103 such items listed. Just these 14 items alone amount to a savings of $566 billion over ten years, more than enough to offset half of the entire sequester amount.
For example, raising the eligibility age for Medicare to 67 would save $23 billion (over 10 years), using the ‘chained’ CPI to measure inflation for all mandatory programs would save $162 billion, tightening eligibility for food stamps would save $50 billion, taxing carried interest as ordinary income would save $17 billion, limiting highway funding to expected highway revenues would save $65 billion, reducing the size of the federal workforce through attrition would save $43 billion, limiting medical malpractice torts would save $57 billion, and modifying Tricare fees for working-age military retirees would save $71 billion. Just these eight savings total $456 billion and would offset almost half of the entire sequester.
What is so difficult about making a tradeoff deal like this? Isn’t this what we send people to Washington to do?
An editorial in yesterday’s New York Times, “Republican No-Shows in the Budget Wars”, ridicules House Republican leadership for having the temerity to propose $4 billion in cuts from this year’s budgets for transportation and housing, and expecting Republican representatives to support such “draconian” cuts. “But the House’s skittishness at the decidedly unpopular costs of some of the party’s budget strictures presented a revealing tableau of both hypocrisy and weakness: Republicans could not pass their own cramped vision of the future.”
The underlying problem is that the House Budget for discretionary spending for 2014, at $967 billion, is almost $100 billion less than the Senate’s $1058 billion budget. The House insists on continuing the sequester cuts for the full ten years agreed upon when the sequester mechanism was set up two years ago. The Senate is ignoring the sequester agreement because it wants to replace it by a combination of milder cuts and tax increases. The Republicans would prefer to replace the across-the-board sequester cuts by a more rational budget cutting plan but the Democrats are unwilling to negotiate such a plan.
The Democratic Party, and its media supporters such as the New York Times, simply refuses to acknowledge that the United States has a fiscal problem. $6 trillion in deficit spending in the last five years apparently does not make a serious impression. The mantra is that we’ll worry about our enormous deficits, and exploding national debt, later, after the economy more fully recovers from the Great Recession. But after four years of recovery such an argument makes no sense. There are lots of effective ways to boost the economy but continued artificial stimulus (deficit spending) is not one of them.
Wake up, Keynesians! We need to turn things around and the sooner the better. Stop ridiculing the mostly Republican fiscal conservatives who are valiantly striving to accomplish this herculean task under the most trying circumstances.
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!
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!
The New York Times is devoting a lot of space recently to debunking the Republican’s supposed campaign to inflict fiscal austerity on the United States. My May 10, 2013 blog entry responded to an NYT article on May 9 entitled “Emphasis on Deficit Reduction Is Seen by Economists as Impeding Recovery”. Now they’re at it again! Today there’s an Op Ed entitled “How Austerity Kills”, by David Stuckler and Sanjay Basu. The authors state that “Recessions aren’t necessarily deadly. But harsh spending cuts are”.
It needs to be pointed out over and over again, as often as necessary until it sinks in, that the current year’s federal budget does not represent a cut. In 2012 actual expenditures were $3,538 billion while the 2013 federal expenditure budget, as estimated three months ago (in February 2013) by the Congressional Budget Office, is $3,553 billion. This represents an increase of $15 billion from last year’s (2012) expenditures to this year’s (2013) estimated expenditures. Holding down budget increases from one year to the next, at a time of enormous deficits, is exactly what our elected representatives ought to be doing. If Mr. Stuckler and Mr. Basu want to argue that the sequester adjustments represent a poor way of holding back on large spending increases, then many Republicans, including myself, would agree with them. Let’s definitely reduce spending increases in a more intelligent way!
But the larger issue is the question of austerity itself. We’ve now had four years in a row of trillion dollar deficits and this year’s deficit is predicted by CBO to be $845 billion. CBO projects deficits of $616 billion for 2014, $430 billion for 2015, and then annual deficits which start growing again (under current policy) and returning to the trillion dollar level by 2023. This represents $7 trillion in additional debt by 2023 beyond the $6 trillion in debt already accumulated in the last five years. To continue on this projected path is the height of irresponsibility! And for the New York Times to refer to this amount of excessive spending as austerity is ludicrous, simply ludicrous!