Category Archives: controlling spending

“A Republic if You Can Keep It”

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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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Perfecting Our Union: Ending the War Against the States

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“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”                                                 The Tenth Amendment to the U.S. Constitution

As the readers of this blog know, I am very concerned about our massive (public) debt, now at 74% of GDP, the highest since the end of WWII. One way to get federal spending under better control is to give more power back to the states (which are required to balance their budgets), as described by Adam Freedman in his new book “A Less Perfect Union: the Case for States Rights.”
CaptureHere are some of the many advantages of doing this, according to Mr. Freedman:

  • Better schools, roads and infrastructure, as states are freed from wasteful federal mandates. The Common Core, for example, should be considered as federal guidelines and not as an attempt to require a specific curriculum.
  • Lower taxes, as states engage in a virtuous competition for citizens and businesses.
  • Improved stewardship of natural resources, as decisions reflect local priorities on land use.
  • Less crowded prisons, by returning criminal jurisdiction to the states, where penal reform is light-years ahead of Washington.
  • An end to national gridlock, as the most divisive social issues devolve to state and local decision-makers. A good example here is the current interest by states and localities to enact their own minimum wage laws. This is far superior to raising the national minimum wage law in a one-size-fits-all manner.

 

The way to implement a program of giving responsibility back to the states is with block grants. A plan to do this for social welfare programs was formulated by the House Budget Committee just one year ago. It is often suggested to do something similar with federal education programs and with Medicaid as well.
Moving programs back to the states will improve their quality and help get costs under much better control. It makes much sense to move in this direction!

Barack Obama vs Paul Ryan: Who Is Moving Us in the Right Direction?

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“If you give a man a fish you feed him for a day.  If you teach a man to fish you feed him for a lifetime.”
Chinese Proverb

Several weeks ago my post, “How to Improve America’s Welfare System,” described a new proposal from the House Budget Committee (Chair, Paul Ryan) to let selected states experiment in consolidating separate federal programs such as SNAP, TANF, child-care and housing assistance programs, into a new composite Opportunity Grant Program.  The idea is to let participating states choose qualified providers who would then be held accountable for moving people off of assistance, out of poverty and into productive employment.
CaptureA recent report from the Tax Foundation compares what families pay in taxes with what they receive in government benefits.  In 2010, 60% of American families (with incomes up to $86,000) received more in federal benefits than they paid in federal taxes.  However in 2012, this percentage grew to 70% (those families with incomes up to $109,000).  In other words, the trend under Obama is for more people to be net receivers of benefits than net payers of taxes. There are two basic problems with this trend towards more and more benefits for more and more people:

  • As it stands right now, we’re making people more dependent on government programs. Instead we should be helping them become more independent and more capable of supporting themselves on their own. This would improve their quality of life.
  • Our federal government is spending way too much money and not collecting enough tax revenue to pay the bills. According to report after report from the Congressional Budget Office, the trajectory of growing debt is getting much worse and the problem will become harder and harder to rectify as we continue down this path.

My natural inclination is to be optimistic that our political process will respond to this bleak current path we’re on and that things will be turned around before we have another financial crisis.  But it is easy to imagine a course of events where this does not happen.
It’s clear what we need to do but how will this get done?

 

The Big Picture on Debt

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Most observers agree that the Congressional Budget Office is a reliable source for detailed, objective and nonpartisan information about the federal budget.  Its frequent reports are cited by all sides in budget debates.  Today I refer to the recent CBO publication, “The 2014 Long-Term Budget Outlook in 26 Slides.”  In particular, one of its graphs entitled “Federal Debt Held by the Public” (pictured here) has a striking message.
CaptureThroughout history, the U.S. has had relatively large debt following each of its major wars, especially after World War II.  But the debt has always declined relatively quickly, as a percentage of GDP, as the economy recovered and grew briskly. But now, in 2014, we are stuck with a huge debt which is projected (by CBO) to not shrink but rather to keep getting much worse.  And furthermore, the so-called “Extended Baseline Projection” in the graph, is an optimistic projection which disregards several long-term trends such as mortality decline, possibly slower productivity growth, higher interest payments and likely growth of federal healthcare spending.
How in the world will this huge debt problem be resolved in a favorable manner?  Republicans don’t want to raise taxes and Democrats don’t want to cut spending, especially on entitlements.  The only action taken in the last few years, under threat of not lifting the federal debt limit, was to implement a Sequester on discretionary spending.  This helps but not nearly enough.
Recent budget agreements are not auspicious for future progress.  A five year farm bill was passed last spring without significant cuts to either farm subsidies or food stamps.  Highway spending was extended for a few months with a gimmick when what we really need to do is increase the federal gasoline tax.  A $17 billion (over three years) increase for veteran’s health has just been approved when what we really need is an extensive overhaul of the Veterans Administration.
There are deficit hawks in Congress, on both sides of the aisle, but their numbers are too small to be effective.  It is just very hard to vote no on spending measures when the pressure coming from special interest groups on all sides is to vote yes.
I am an eternal optimist by nature but I have a hard time visualizing a favorable outcome to our fiscal dilemma.  I am arranging my own affairs accordingly.

How to Control Federal Spending III. Reform Medicaid!

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One of the many controversies involving the Affordable Care Act concerns the expansion of Medicaid to cover low income people up to 138% of the federal poverty level.  As Robert Samuelson reported in the Washington Post a few days ago, “The Real Medicaid Problem,” 24 states have refused to expand Medicaid coverage even though the federal government will pay 100% of all additional costs until 2017.
CaptureAs Mr. Samuelson points out, the underlying issue is a matter of cost:

  • The basic Medicaid program is funded with a fixed percentage of each state’s costs paid by the federal government. This means that the more a state spends, the more is contributed by the federal government. From 1989 to 2013, the share of state budgets devoted to Medicaid has risen from 9% to 19%. This upward trend is clearly unsustainable.
  • In Medicaid, children and adults up to age 65 represent three-fourths of beneficiaries, but only one-third of costs. The quarter of beneficiaries who are aged or disabled are responsible for two-thirds of costs.
  • More than 60% of nursing home residents are on Medicaid.
  • There is no assurance that the federal share of the expanded coverage will continue at the announced rate of 90% after 2017 because the federal government is in much worse financial shape than are most states.

An interesting Op Ed appeared recently in the Wall Street Journal, “The Smarter Way to Provide Health Care for the Poor,” written by Mike Pence, the Governor of Indiana.  In 2008 Indiana set up the Healthy Indiana Plan to better serve low income Indianans.  It now provides Health-Savings Accounts to 40,000 low income citizens, with very good results.  Indiana is applying for a waiver to the ACA to use Medicaid expansion funds to provide HIP to all low income families up to 138% of the poverty level ($33,000 for a family of four).
Clearly, individual states, when offered the opportunity, are quite capable of coming up with innovative solutions for difficult problems.
A good way to resolve the problem of state resistance to Medicaid expansion is to fundamentally change Medicaid into a block grant program whereby the federal government contributes a specific amount of money to each state each year.  Then the states design their own programs to meet their own needs.  Block grant funding for Medicaid is a common sense approach to address one aspect of our huge fiscal problem in an intelligent way!

 

How to Control Federal Spending: The Highway Trust Fund

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The federal Highway Trust Fund is almost out of money.  It takes in $35 billion per year from the 18.4 cents per gallon federal gas tax, which has not been raised since 1993.  Sometime this summer the government will have to cut back on payments to state highway departments unless Congress acts.
CaptureAs the above chart from the Economist  shows, the U.S. spends much less of GDP on roads than many other developed nations.  Something clearly needs to be done because we need many improvements in infrastructure.  But there are better ways and poorer ways to solve this problem.  Here are two good ways as described by Thomas Donlan in a recent issue of Barron’s:

  • A bill to raise the gas tax by 12 cents per gallon over two years has been introduced in the Senate by Bob Corker (R, Tenn.) and Chris Murphy (D, Conn.). Each penny added to the federal gas tax rate will raise $1.3 billion and this would solve the problem.
  • Repeal the federal gas tax and turn federal highway construction entirely over to the states. Each state could then increase its own gas tax and/or pay for construction with tolls on bridges and roads.

Here are two examples of poor ways to replenish the Highway Trust Fund:

  • Continue adding to the Fund with borrowed money. $54 billion has been borrowed since 2008 for this purpose. Presumably the Sequester will make it much harder to continue such deficit financing.
  • Rep John Delaney (D, Mary.) has proposed a tax break for repatriated foreign profits by multinational American companies if part of the money brought back was spent on infrastructure bonds. This would interfere with the urgent need to reform corporate taxes with significantly lower rates offset by lowering deductions, in order to make our corporate tax internationally competitive.

Conclusion: There is a good chance that the Budget Sequester established by Congress in 2011 to control discretionary spending, as well as the widely recognized urgent need for corporate tax reform, will lead to a “good” rather than “bad” solution to the shortfall in the Highway Trust Fund. This is just one specific example of the challenge to sensible budgeting by Congress.
A much broader approach is needed to really shrink the deficit.  Stay tuned!