“A Republic if You Can Keep It”

 

Such was the response of Benjamin Franklin to an inquiry from a citizen outside of Independence Hall in Philadelphia in 1787.  Today our national government is highly dysfunctional and Congress has an especially low approval rating of 11%. U.S. Senator Mike Lee (R, Utah) believes that Congress is rightly to blame for the dysfunction.
Capture8Says Mr. Lee in an article, “The Incredibly Shrinking Congress,” in the July 11, 2016 issue of the National Review:

  • The powers vested in Congress in Article I of the Constitution are orders of magnitude stronger than the powers given to the President (Article II) or the Supreme Court (Article III). This is because legislators are closer and more accountable to the people. Here is what Congress is doing wrong:
  • Too much power is delegated to the executive branch by allowing federal agencies to write the vast majority of the laws in the form of rules, regulations and legal interpretations.
  • Congress surrenders too much authority over federal spending to the President by letting the budget process come down to a single yes or no vote up against a crisis deadline.
  • Congress delegates too much of its constitutional oversight powers to the judicial branch. The answer is to make agency rules subject to Congressional veto.
  • Unfortunately too many members have a vested interest in a weak Congress because it relieves them of the hard job of legislating conscientiously. Only a strong Congress can fix a weak Congress. For example, Congress could:
  • Require legislative approval of major new rules and reauthorizations of existing ones.
  • Modernize its budget process to make sure that all agency budgets get proper individual consideration.
  • Rein in executive discretion by, for example, directing federal judges to conduct traditional judicial reviews in challenges against the administrative state, instead of simply deferring to the agencies own interpretations.

As Mr. Lee concludes, “Putting Congress back in charge of federal policy, would put American people back in charge of Washington, regardless of who sits in the oval office.” In today’s divisive and destructive political environment, this is a very good idea indeed.

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Passing a Balanced Budget Amendment to the Constitution

 

My last three posts have discussed the long term damage that will be caused by excessive spending in the recently passed 2016 federal budget and what should be done about it.
CaptureThere is at least one way to force Congress to act in a responsible manner, namely, by putting into effect a Balanced Budget Amendment to the Constitution.  Here is a brief history of recent efforts to do exactly this:

  • In the 1995-96 session of Congress, the House of Representatives passed (by a 2/3 vote) a BBA but it was defeated in the Senate by one vote.
  • Application by 34 states requires Congress to call a Constitutional Convention to propose an amendment. At the end of 2009, 16 states had so applied. Each year since one or more new states have also applied and now there are a total of 27. An additional 13 states are actively considering applications for a BBA at the present time.
  • As the number of applying states gets close to the required 34, it becomes more and more likely that Congress will act on its own in order to preempt a “Con-Con.” This would avoid the messiness and uncertainties of such a convention, none of which have yet occurred in our nation’s history.
  • Once 34 states have applied, however, Congress must call a convention. Any fear of a runaway convention, exceeding a limited mission, should be alleviated by the fact that any proposed amendment(s) have to be ratified by 38 states.
  • In my opinion a proposed amendment should have no restrictions on how a balanced budget will be obtained. There will be far more political pressure to cut spending than to raise taxes. Let Congress hash out the proportion of each.

Fiscal responsibility does not require the budget to be exactly balanced each year. In fact, temporary deficits can be useful as a stimulus in time of recession.  However, deficit spending has gotten so far out of control in recent years that Congress must be forced to modify its behavior.

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Republican Congress Approves Irresponsible Budget

 

Congress has adjourned for Christmas having passed a final budget for the 2016 Fiscal Year extending through next September. It puts into place for this year the two year spending agreement reached between Congress and the President in October.  However Congress started out the year by passing a ten year budget plan resolution leading to a balanced budget by 2025.  The budget just passed leads instead to a deficit of $1.1 trillion in 2025.
CaptureHere are the details as described by the nonpartisan Committee for a Responsible Federal Budget:

  • Revenue: decreased under new budget by a $650 billion (over ten years) by making various temporary tax deductions permanent.
  • Discretionary Spending: increased by $50 billion for the current budget year (by breaking the sequester cap).
  • Medicare: instead of saving $430 billion over ten years, Medicare spending is increased by $95 billion over ten years.
  • 2025 Deficit: instead of shrinking to zero in ten years, it is now projected to be more than $1 trillion in 2025.
  • 2025 Debt: currently the (public, on which we pay interest) debt is 74% of GDP. The ten year balanced budget plan would reduce the debt to 56% of GDP. Instead, the debt is now on track to reach 80% of GDP by 2025.

Granted the Republican Congress hopes to develop a tax reform plan in 2016 which would lower tax rates for everyone, paid for by closing many of the loopholes and deductions just approved last week. One very good way to do this has recently been proposed by the Tax Foundation. The TF plan would boost economic growth and thereby increase tax revenue substantially over ten years.
The problem is that real tax reform is unlikely to happen without a Republican president in office.  If a Democratic president is elected in 2016, then the dire predictions made by the CRFB (above) are likely to remain valid for the foreseeable future. Our fiscal and economic future remains quite precarious at the present time!

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Resolving the Current Budget Impasse in Congress

 

Congress is facing two critical fiscal deadlines in the very near future. Our current debt ceiling of $18.1 trillion will be exceeded by November 4.  A temporary 2016 budget was passed that will fund the federal government at its current level through December 11.  There is much pressure on Congress to lift the sequester limits for discretionary spending which have been in effect since early in 2013.  The Republican majorities in Congress should use their leverage to promote fiscal responsibility in the following way:

  • Extend the debt ceiling by $1 trillion or enough to last about two years at our current rate of deficit spending. Control over the debt ceiling gives Congress an important tool with which to remind the voters of the urgency of shrinking the national debt. Make it clear that in return for supporting payment of existing obligations, Republicans will insist on far more spending restraint in the future.
  • For example, Congress should agree to only additional short term extensions of this year’s budget at current spending levels, including sequester limits, until a long-term budget plan is locked into place along the lines of:Capture
  • The ten year budget plan adopted by Congress last Spring produces a balanced budget by 2025. Perhaps surprising to many people, it still allows spending to increase by 3.3% annually which is approximately double the current rate of inflation.

Such a plan of indefinite short term budget extensions at current levels will get the focused attention of all big spenders including conservatives who want more military spending as well as the President and his Democratic allies in Congress.  Everything should be on the table: entitlement reform, tax reform, immigration reform, etc.  There need be no deadline for agreement; the current budget could simply be renewed at short term intervals until a mutually acceptable plan was achieved.  No plan, then no budget increases.  Take your pick.
Conclusion: a national debt of 74% of GDP is in fact a fiscal crisis and the Republicans have enough leverage to force a showdown in a sensible way.  They should use it!

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Could the U.S. End Up Like Greece? II. How Long Will It Take?

 

My last blog post, “Could the U.S. End Up Like Greece?” compares Greece’s present fiscal situation (public debt at 180% of GDP) with our own current fiscal situation (public debt at 74% of GDP and rising fast).  The Congressional Budget Office predicts that, under current policy, the U.S. debt will not reach 180% until about 2055, forty years from now.  One could (wrongly!) conclude from this that we are okay for the time being.
CaptureHowever, this is not true!  The Peter G. Peterson Foundation has taken a closer look at the most recent CBO report.  Under a less optimistic, but more realistic, Alternative Fiscal Scenario, the U.S. debt will reach 175% in 2040.  The Alternative Fiscal Scenario assumes, for example, that:

  • About 50 expiring tax breaks will continue to be extended year by year, as they were in 2014 and have been repeatedly in the past. These “tax extenders” increase the deficit by over $40 billion per year.
  • Discretionary spending will soon rise back up to its historical share of GDP. In other words, the sequester, which is currently holding down the growth of discretionary spending, may be overridden or at least relaxed.

Greece, with its debt at 180% of GDP, is only being required by the European Central Bank to pay 1.7% interest on this debt indefinitely into the future.  Thanks to the low interest rate policy of the Federal Reserve, 1.7% is also the current rate of interest being paid on the U.S. debt.  But this historically low interest rate is unlikely to continue much longer without setting off a much higher rate of inflation.
In other words, we’ll likely be in the same situation as Greece is currently, in much less than 25 years.  Furthermore, Germany and the other EU countries have been keeping Greece afloat for years and may continue to do so.
Who is going to bail us out when we get to where Greece is now?  China?  Unlikely.  We’ll be on our own and it won’t be pretty!

Fixing the Debt: Creating a Greater Sense of Urgency II. An Example

 

My last post, ”Fixing the Debt: Creating a Greater Sense of Urgency,” expresses my dismay that our huge debt problem does not receive enough serious attention from the American people.  Yes, most Americans deplore the national debt and the deficit spending that leads to it, but it only too seldom affects how they vote for candidates for federal office, thus giving a pass to the big spenders in Congress.
CaptureHere is a good example of this refusal to take the debt seriously.  The advocacy group FAIR (Fairness and Accuracy in Reporting) ridicules NPR for addressing this problem, “Look a Deficit: How NPR Distracts You From Issues That Will Actually Affect Your Life.”  Here is what FAIR is saying:

  • Interest on the national debt is projected to be only 2% of GDP in 2016 and 3% of GDP in 2024, which is tiny. (But this is because the interest rate for the debt is now abnormally low, approximately 1.7%).
  • If the Fed keeps interest rates low, then interest on the debt will continue to stay low indefinitely and so the debt will continue to be a trivial problem. And the President appoints 7 of the 12 voting members of the Fed Open Market Committee which sets interest rates.
  • The reason the Fed raises interest rates is to slow the economy and keep people from getting jobs.  (Actually the real reason is not to keep people from getting jobs but to keep inflation under control. Once inflation takes off, it is very difficult to bring it back down as we painfully discovered in the late 70s and early 80s).
  • Anyhow, if the Fed raises interest rates to keep the labor market from tightening, as it did in the late 1990s, this would effectively be depriving workers of the 1.0 – 1.5 percentage points in real wage growth they could expect if they were getting their share of productivity growth. (A rise in interest rates need not choke off economic growth which is primarily affected by supply and demand. Fiscal policy (tax rates and spending), established by Congress, has a far greater effect on the rate of economic growth than does monetary policy).

 

If our debt is not soon placed on a sustainable downward path, we will soon have another financial crisis, much worse than the Great Recession of 2008.  This will affect everyone’s life in a substantial and very unpleasant way.

Where Should the New 114th Congress Focus Its Attention?

 

The two main themes of this website are how to boost economic growth and how to get our national debt under control.  Faster economic growth will put more people back to work by creating more jobs.  Faster growth will also bring in more tax revenue and therefore potentially reduce deficit spending.
The latest monthly unemployment rate, 5.8% for November 2014, is much higher than it should be almost six years after the end of the Great Recession in June 2009.  The best thing that Congress could do to boost economic growth is to adopt broad-based tax reform, lowering tax rates in a revenue neutral way by closing loopholes and limiting deductions.  I’m still in favor of doing this but I no longer consider it to be the top priority for the following reason.
The huge drop in the price of gasoline is already providing a big economic stimulus.  At the current price of $2 per gallon, the average American family will save about $750 per year in driving expenses.  This is even more relief than a tax cut would provide.  The economy has already picked up steam in 2014 and is predicted to grow at the rate of 3% in 2015.  This will keep the unemployment rate decreasing steadily throughout 2015 and beyond, which represents much progress.
Capture1It’s now time for Congress to focus more strongly on putting the debt on a downward path.  This can only be done by shrinking our annual budget deficits well below the $483 billion deficit for the last (2014) budget year.  As the above chart from Fix the Debt shows, our current fiscal path leads inexorably to a growing debt which is completely unsustainable in the long run.  Annual deficits will have to be at least cut in half to be able to turn the debt trajectory downwards.
Getting this done will require much dedication and hard work by Congress.  Many programs will have to be eliminated.  Surviving programs will need to operate more efficiently.  The entitlement programs of Social Security, Medicare and Medicaid will have to be greatly tightened up.
Is Congress up to this task?  The future of our country depends on it!