As regular readers of this blog well know, I constantly advocate for two major changes in government policy:
Speeding up economic growth, which has averaged an anemic 2.1% per year since the end of the Great Recession in June 2009. This will create the new and higher paying jobs that country so badly needs.
Shrinking annual deficits, ideally down to zero, so that our huge public debt (on which we pay interest) will begin to decrease as a percentage of GDP over time.
My last post compared the President’s proposed budget for 2017 with a proposal from the House Budget Committee. Basically the President’s budget increases both taxes and spending while the House budget keeps revenues at a steady 18.2% and leads to a balanced budget after ten years. The non-partisan Committee for a Responsible Federal Budget has just produced an interesting report, ”How Much More Would Government Spend Under the Next President?” It compares the spending plans of the remaining five presidential candidates from both parties. It finds that:
Only John Kasich would actually decrease spending over the next decade from 22.1% of GDP (under current law) to 21.5%.
The other four candidates would all increase spending: Hillary Clinton (to 22.5%), DonaldTrump (to 22.7%), Ted Cruz (to 23.4) and Bernie Sanders (to 29.5%).
Mr. Kasich’s spending restraint would amount to a 2% decrease over current law while Ms. Clinton, for example, would increase spending by 2%.
As I showed a year ago, reining in spending by 2% per year over current law is a major achievement and will lead to a balanced budget in ten years. In other words, Mr. Kasich’s spending plans are in sync with the latest House Budget Committee proposal. Perhaps this should not be surprising since Mr. Kasich served as Chair of this House Committee in the 1990s! Easy question: Which presidential candidate and which chamber of Congress are acting in the most fiscally responsible manner?
In January I had several posts advocating in favor of a Balanced Budget Amendment to the U.S. Constitution. Briefly, the argument runs as follows:
Our public debt (on which we pay interest) is now at 74% of GDP, the highest it has been since the end of WWII.
Democrats want to raise taxes and increase spending; Republicans want to cut taxes and decrease spending. The only way to satisfy both parties simultaneously is to run huge annual deficits which is exactly what has happened ever since the end of the Great Recession in 2009.
Current planning for the next budget year beginning October 1, 2016 has now begun. Both the House Budget Committee and the President have budget proposals for next year. As reported by the Peterson Foundation, these two budgets differ substantially:
The President’s budget would hold the public debt at about 75% of GDP over the next ten years by both raising taxes and increasing spending on a variety of programs.
The House Budget Committee plan keeps revenues steady at 18.2% of GDP over the next ten years and achieves a balanced budget after ten years. By 2026 the debt held by the public would fall to 57% of GDP from its current 74% level.
Here are two significantly different ten year budget plans. What is likely to happen is a complete standoff without any bipartisan agreement. This means that no appropriations bills for individual government agencies will be enacted by October 1. Finally, as usual, an omnibus spending bill will be put together by Congressional leaders and forced through at the last minute to avoid a government shutdown.
A BBA would make both sides compromise and come up with an overall plan. It would likely contain both spending restraint and new sources of revenue. Then the various Congressional committees would hammer out the spending details for individual agencies and department. It would be a far more sensible and transparent process than the way things are done now.
Congress and the President have to be forced to act in such a reasonable manner. A Balance Budget Amendment is perhaps the only way to make this happen.
My last two posts, here and here, argue that America’s two most critical problems are:
Speeding up economic growth in order to create more jobs and better paying jobs, especially for middle- and lower-income workers whose wages have been stagnant for the past 15 years.
Getting our large and rapidly growing national debt under control by shrinking annual deficit spending. This will put our debt on a downward path as a percentage of GDP.
Many Facebook comments on these posts inquire about how these goals will be accomplished. If tax reform is the best way to increase economic growth, how can this be done in a way that is fair to the non-wealthy. If spending cuts are necessary to balance the budget, what cuts should be made? Here is a summary of my views on these questions:
Growing the economy with tax reform. The best way to spur investment and business expansion is with the lowest possible tax rates on owners and investors. Broad-based tax reform, with lower tax rates for all, paid for (i.e. in a revenue neutral way) by closing loopholes and shrinking deductions, will accomplish this. The 64% of taxpayers who do not itemize deductions will increase their income with tax rate cuts. Lower tax rates for the affluent will be offset by shrinking deductions and closing loopholes.
The corporate tax rate should also be cut to internationally competitive levels, again paid for by drastically shrinking, if not totally eliminating, all deductions. This way all corporations (including GE!) would pay the same tax rate. And American companies would have much less incentive to move overseas.
Reducing our national debt. We have got to drastically shrink our annual deficits (now running about $500 billion per year) in order to put our national debt on a downward course, as a percentage of GDP. The House Budget Committee has recently passed a plan to balance the budget within ten years. Not everyone will agree with the details, but at least it’s a starting point. An alternative approach is to adopt a Balanced Budget Amendment to the U.S. Constitution. This would require Congress to make tradeoffs annually between either restraining spending or raising taxes. A BBA will force them to do what they should be doing anyway!
I have written several posts recently advocating for a Balanced Budget Amendment to the U.S. Constitution. A number of people have responded (on FaceBook) that we don’t really need a BBA, we just need to elect honest politicians who won’t be corrupted by money. Candidates at all levels need money to run a campaign. Candidates will inevitably be grateful to their contributors and, if elected, will want to return the favor. If the donors are publicly identified, then the influence of their money can be kept track of. In fact it is dark money, not money in general, which is the big problem:
Jeb Bush, in single digits in the Republican polls, has raised far more money than any other candidate. Donald Trump, far ahead in the polls, is near the bottom of the list in money raised. But Mr. Trump has enough money, and media attention, to get his message out.
Bernie Sanders, who is rapidly gaining on Hillary Clinton in most polls, has only raised two-thirds as much money as Ms. Clinton. Again, Mr. Sanders is getting his message out, which is what counts.
Where dark (i.e. individual donors are undisclosed) money has been so effective is in races for the U.S. Senate which are somewhat under the radar with regard to national exposure. For example, in 2014, in 10 closely contested Senate races, eight of the winners were heavily supported with dark money.
It is often suggested that we need an amendment to the Constitution to overturn Citizens United, the Supreme Court decision that allows unlimited political contributions from outside groups. I think that such an amendment would be very difficult to either propose by a two-thirds vote or to be ratified by three-fourths of the states. Congress itself could outlaw dark money by simply passing an appropriate law.
On the other hand, enacting a Balanced Budget Amendment is far more feasible. In fact 27 states have already called for a Constitutional Convention to propose such an amendment. Only 7 more states are needed to do this and we’ll be on the way!
I have been writing a lot lately about the need for a Balanced Budget Amendment to the U.S. Constitution. Our public debt (on which we pay interest) is now over $13 trillion and amounts to 74% of GDP. And this percentage, the highest since the end of WWII, is projected by the Congressional Budget Office to keep growing indefinitely. Eventually this will lead to another financial crisis, likely much worse than the one we’re still getting over with. Here is a vivid example of why it’s so hard for Congress to stop spending more each year than is collected in tax revenue. Vice President Joe Biden wants to launch a cancer “moonshot”, in honor of his late son Beau who died from brain cancer in May 2015, by “increasing resources – both public and private – to fight cancer.” This is an apparently attractive but actually poor idea for the following reasons:
The annual budget for the National Institutes of Health, which fund medical research, has already been increased by $2 billion for the current 2016 budget year.
Major advances in immunotherapy are enabling oncologists to target the surface of cancerous cells instead of using chemotherapy that affects the whole body. But these targeted therapies routinely cost over $100,000 a year per patient.
Everyone would like to speed up the war on cancer. But we’re already spending billions of dollars a year on it and cancer researchers are making steady advances. In other words, we should leave well enough alone on the cancer front and focus on a much more fundamental problem which is already severe.
I am referring, of course, to our excessively large and rapidly growing national debt. Right now interest rates are at historic lows and so our debt is almost “free money”. But this is already starting to change and soon interest payments on the debt will be eating us alive. We’re already in a deep hole but at least we can stop making it any deeper than it already is.
This is exactly what a Balanced Budget Amendment will accomplish.
Ever since the end of World War II the strength of the United States has guaranteed world order and stability. As Americans we are especially fortunate to live in such a strong, free and prosperous nation. But our future wellbeing depends on the soundness of our economy and the integrity of our financial system. This includes being able to pay our country’s debts in any circumstances.
The public debt (on which we pay interest) is now 74% of GDP, the highest it has been since the end of WWII. The Congressional Budget Office, our most objective and nonpartisan source for fiscal and budget information, predicts that the debt will continue to rise indefinitely, presumably until we have another financial crisis, which is likely to be much worse than the Great Recession of 2008-09. It is almost impossible for Congress to address our debt problem effectively. Democrats want to spend more money while Republicans want to avoid raising taxes. The wishes of both can be satisfied only by increasing deficit spending and therefore borrowing more money. Right now this practice is pain free because interest rates are so low.
But this situation will not last forever and is, in fact, already starting to change. The Federal Reserve raised short term interest rates by .25% in December 2015 which raises interest payments on the $13 trillion public debt by $33 billion per year. Warding off inflation will require many more such rate increases in the future.
The only way to force Congress to act on this problem is with a Balanced Budget Amendment to the U.S. Constitution. 27 States (out of a required 34) have called for a Constitutional Convention to propose a BBA. As more states are added to the list, Congress may decide to propose a BBA on its own.
I have discussed previously how to make a BBA both effective and flexible enough to handle emergencies. It is likely that the proponents of a BBA would draft it carefully because it would have to be ratified by 38 states in order to take effect.
This is the best argument I can make for a BBA. I will now move on to other topics!
For the past two weeks I have been I have been complaining about Congress’s irresponsible budget for 2016 and that we should now be pushing hard for a Balanced Budget Amendment to the Constitution. In my last post I make the case that a flexible BBA is compatible with economic growth and will, in fact, contribute to it once it goes into effect. Friday’s job report for December strengthens this argument:
In 2015 there was an increase of 2.65 million new jobs only slightly less than 2014’s 3.15 million new jobs, the two best years for job growth since 2000.
The current unemployment rate of 5.0% is the best since the end of 2006.
Although wage growth at 2.4% for 2015 is not as strong as the early 2000’s, wages have now been climbing 2% faster than price inflation for the past three years.
The offsetting negatives are a still slow GDP growth estimated at 2.2% for 2015 and a still very low labor participation rate of 62.6%.
Conclusion: At some point in the very near future the government needs to stop spending far in excess of tax revenue. The sooner we recognize this the easier it will be to make the necessary correction. Our economy is the strongest it has been since the end of the Great Recession in June of 2009. Getting government spending in better sync with tax collections will be a big challenge and will not happen overnight. In fact, if a BBA is required to get the job done it will take several years to implement this route to fiscal responsibility.
For all of these reasons now is the time to start moving on this gigantic and festering problem!
I have devoted several recent posts to discussing the desirability of a Balanced Budget Amendment to the U.S. Constitution as well as the specifics of how to set it up in an effective yet flexible manner. The Wall Street Journal’s Greg Ip has a pertinent article along this line in today’s paper, “Don’t Celebrate the End of Austerity” in which he argues that the recent congressional deal for the current 2016 budget year, which I and many others have criticized as being fiscally irresponsible, will finally contribute to economic growth after five years of overly “austere” budgets.
This raises the critical question: is it possible to speed up economic growth without the stimulus of deficit spending? Would a BBA create a stranglehold on spending which would slow down the economy? I feel very strongly that fiscal responsibility and economic growth are compatible and, in fact, contribute to each other in the long run. Here is what we should do:
First of all, either through Congressional action or with a Constitutional Convention, a BBA needs to be proposed, and then ratified, to put our fiscal house in order before our rapidly growing debt rises to ruinous levels. A flexible BBA would include a five year phase in period, after ratification, to give Congress time to prepare for it. There will be some pain in achieving this initial balance but it needs to be done and the sooner the better.
Secondly, a flexible BBA would also allow for a 2/3 majority of each House to override strict balance. This feature could be used not only for a wartime emergency, for example, but also for occasional recessionary periods where stimulus is needed.
Finally, keep in mind that the real goal is not a BBA per se, but rather to put our debt on a downward path over time as a percentage of GDP. This is what a flexible BBA will accomplish.
Once initial balance is achieved, it will be relatively easy to hold new debt down to manageable levels. Our current fiscal problem will then be largely solved and we can continue building a stronger, freer and more prosperous future for our country.
I have made the case in several recent posts, here, here, and here, as to why we need a Balanced Budget Amendment to the U.S. Constitution. This is a very timely issue since 27 states (out of the 34 required) have now called for a Constitutional Convention to propose such an amendment.
Many people have pointed out the difficulty of creating such an amendment which would be both effective enough to get the job done as well as flexible enough to allow for any emergencies which might arise. Here are some suggestions for the main features which are needed:
Prior to the beginning of each fiscal year, the President is required to submit a proposed budget for the U.S. Government in which total outlays do not exceed total receipts.
Congress need not adopt the President’s proposed budget but is likewise required to adopt a balanced budget for the coming fiscal year.
A two-thirds vote of each House of Congress is required to approve an excess of outlays over receipts, either for the entire budget or for supplemental spending once the fiscal year has begun. (Many proposed amendments require only three-fifths majorities for override but I think that this is insufficient.)
Congress may pass appropriate legislation to implement and enforce this amendment. For example, official estimates of receipts and outlays could be provided by the Congressional Budget Office.
The BBA amendment takes effect beginning with the fifth fiscal year following its ratification. (The idea here is to provide Congress with a sufficient time window to whittle down our current deficit spending, approximately $450 billion, to a more manageable amount, before the strict limits of the BBA take effect.)
Keep in mind that the real purpose of a BBA is not to establish exact numerical balance for the budget but to put our national debt on an overall downward course as a percentage of GDP. Occasional spending overrides during the budget year, as long as they are reasonable, will not detract from this goal. A two-thirds majority vote for balance overrides should be sufficient to accomplish this.
Several recent posts, especially here and here, have advocated for a BBA to the U.S. Constitution and pointed out that 27 states (out of a required 34) have now called for a Constitutional Convention to propose a BBA. I pay careful attention to the responses I receive to my posts. Several folks have said that while they support a balanced budget, there are other higher priorities for them, such as ending wasteful and inefficient programs or focusing more on the needs of people rather than being overly worried about budgetary matters. I contend that a carefully formulated BBA would do far more than just solve our debt problem, as important as this is. For example:
An essential component of a BBA would require the President to submit a balanced budget to Congress each year. So it starts out by forcing the Administration to set priorities. If a new program is advocated, fine, but then it has to be offset by cutting back on existing programs, or else raising taxes. Congress need not accept the President’s priorities but then it has to set its own.
It would become a huge priority for both Congress and the President to carefully examine all programs to ferret out waste and inefficiency. There would be an incentive for programs to be shifted to the states, with the flexibility to make them more effective, in return for cost savings.
The best way to raise stagnant wages for the middle class is to make the economy grow faster. The best way to grow the economy faster is broad-based tax reform, with lower tax rates across the board, paid for by closing loopholes and shrinking deductions. But faster economic growth will also bring in more tax revenue, therefore making it easier to shrink the deficit and balance the budget.
Conclusion: A Balanced Budget Amendment to the U.S. Constitution would have many benefits, beyond “mere” fiscal responsibility. Next question: how should a BBA be formulated to insure that it is both effective and flexible enough to allow response to emergencies?