Congress has just voted to postpone the debt ceiling by three months until December 8. That’s okay; it’s just a tactic which also provides quick federal help for the damage caused by Hurricane Harvey. The important thing is not to repeal the debt ceiling entirely.
As I have said before, global warming and national debt are both creeping catastrophes. We ignore them at our great peril. Right now hurricanes Harvey and Irma are reminding us of the huge devastation which can be caused by extreme weather events (which are made more likely by global warming).
In the same way, having an explicit debt ceiling reminds us at regular intervals that we have a very serious problem which will eventually catch up with us if we don’t take strong action to address it.
The National Debt, now 77% of GDP (for the public part on which we pay interest), is the highest it has been since right after WWII. It is predicted by the non-partisan Congressional Budget Office that it will keep getting steadily worse without major changes in current policy.
The urgency of the debt problem is based on the fact that interest rates are now so low that our debt is almost “free” money. But interest rates will inevitably return to more normal, and higher, historical levels and, when this happens, interest payments on the debt will increase dramatically. This will eventually lead to a new Fiscal Crisis, much worse than the Financial Crisis of 2008.
The solution to this problem need not be drastic. Federal spending is growing by 5% per year while tax revenues are increasing by 3% per year. All we need to do, so to speak (because it will take some restraint!), is to hold spending increases to about 2.5% per year and then the federal budget would be balanced in a few years and debt would start shrinking as a percentage of GDP.
Conclusion. Congress, the President and the American people need to be reminded often and loudly how serious the debt problem is. Hopefully the message will eventually sink in. The sooner the better!
As a new administration prepares to take office in January, one of the key indicators of President Trump’s approach to government will be his first budget. This is especially true since the Republican controlled Congress is likely to take a Republican President’s budget seriously.
One of our nation’s chief fiscal watchdogs, the Concord Coalition, has summarized the most important things to look for:
What is the overall fiscal target? President Obama’s recent budgets have aimed at stabilizing the debt as a share of the economy. House Republicans have aimed for a more ambitious goal of balancing the budget within ten years, gradually reducing the debt as a share of the economy. What path will Mr. Trump recommend?
What specific tax cuts will be proposed and what are the likely revenue effects? During the campaign Mr. Trump proposed tax cuts amounting to $5.9 trillion in revenue loss over ten years. Even with dynamic scoring, taking the stimulatory effects of his tax cuts into effect, the revenue loss is still $3.9 trillion over ten years. Such huge revenue losses will make our debt much worse than it is already and won’t be approved by Congress.
What will the budget recommend for the federal debt limit? Currently the debt limit is suspended until March 16, 2017 when it will return at whatever level it is on that date. Congress will then have several months to reset it. Whatever the President recommends will send a strong signal, positive or negative, to the financial markets.
What economic growth rates will the budget assume? GDP growth has averaged 2.6% for the past 30 years. Any predicted long term growth rate higher than this will lack credibility without strong justification.
Conclusion. Mr. Trump has the opportunity to institute the change in course which so many Americans would like to see. His first budget will set the tone and provide an important clue as to whether or not he is serious about doing this.
I discuss two fundamental economic and fiscal problems on this website:
The slow growth of our economy, only 2.1% per year since the end of the Great Recession in June 2009. This is largely responsible for stagnant wages for middle- and low-income workers, which is in turn responsible for the rise of the populist presidential candidates Bernie Sanders and Donald Trump.
Our massive national debt, now 74% of GDP for the so-called public part, on which we pay interest. This is the highest it has been since right after WWII.
Slow economic growth gets more public attention because of its direct and negative effect on so many people. However massive debt is more of an existential problem. Right now our debt is almost “free” money because interest rates are so low. But with debt predicted (by the Congressional Budget Office, for example) to keep climbing steadily under current policy (see the first chart) and with the inevitability of increased interest rates in the future, interest payments on the public debt are bound to rise precipitously. The second chart just above (from the Concord Coalition) shows that interest payments on the debt will likely soon become the leading source of growth in federal spending. But perhaps surprising is that the three non-interest sources of spending growth are the entitlement programs, Medicare, Social Security and the combined Medicaid, CHIP and ACA exchange subsidies. All other government spending will decrease in relative terms. Is it not readily apparent from this data that the only way to curtail a huge fiscal crisis in the not so distant future is to get entitlement spending under much better control? The last chart, just above, (from the Trustees of SS and Medicare) shows the growth in general fund revenue required for Medicare and SS going forward. In 2016 the discrepancy is 2.1% of GDP which amounts to $401 billion. The discrepancy will double by 2040. Of course, OASDI (SS) and HI (Medicare Part A) have trust funds paid into by payroll taxes. But these trust funds are already paying out more than they take in and will be exhausted in a few years.
Conclusion. Spending on entitlement programs must be brought under much better control. How to do this will be the topic of my next post.
A tentative budget deal has just been reached by Congress and the President to 1) suspend the debt limit until March 2017, and 2) loosen the budget sequester caps by $112 billion over the next two years. $80 billion of the increased spending will be balanced by spending cuts elsewhere in the budget with details to be worked out later by various appropriations committees. Specifically:
The current debt ceiling of $18.1 trillion will be lifted until March 2017, after a new president takes office. This will allow an expected increase in the debt of about $900 billion to take place over the next 1½ years.
Both military and discretionary non-military spending will increase by $40 billion each over the next 2 years with the military receiving an additional $32 billion for Overseas Contingency Operations.
The problem is that such a deal essentially just maintains the budget status-quo. It does nothing to begin shrinking annual deficits in order to put our accumulated national debt on a downward path as a percentage of GDP. Our current debt of 74% of GDP is very high by historical standards and simply must be brought down significantly in the near term. As I explained in my last post, Congressional Republicans, with majorities in both the House and the Senate, should be able to apply much more leverage than was used in the deal just reached, as follows:
Yes, extend the debt ceiling for two years. We need to pay our debts. But insist on spending discipline from now on.
Allow only brief temporary budget extensions at current levels until a plan is adopted to put deficits and debt on a downward path. The Republican ten year plan for a balanced budget would be a good place to start.
It’s time for fiscal conservatives to stand up and be counted!
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:
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!
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. Throughout 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.
The economist and public lecturer, Richard Wolff, gave an address in Omaha NE last night, entitled “Capitalism in Crisis: How Lopsided Wealth Distribution Threatens Our Democracy”. His thesis is that after 150 years, from 1820 – 1970, of steadily increasing worker productivity and matching wage gains, a structural change has taken place in our economy. Since 1970 worker productivity has continued to increase at the same historical rate while the median wage level has been flat with no appreciable increase. This wage stagnation has been caused by an imbalance of supply and demand as follows:
Technology has eliminated lots of low skill and medium skill jobs in the U.S.
Globalization has made it less expensive for low skill jobs to be performed in the developing world at lower cost than in the U.S.
At the same time as jobs were being replaced by technology and disappearing overseas, millions of women entered the labor force.
A new wave of Hispanic immigration has caused even more competition for low skilled jobs.
In addition, stagnant wages for the low skilled and medium skilled worker have been accompanied by an increase in private debt through the advent of credit cards and subprime mortgage borrowing. This enormous increase of consumer debt led to the housing bubble, its bursting in 2007-2008, and the resulting Great Recession.
Five years after the end of the recession in June 2009, we still have an enormous mess on our hands: a stagnant economy, high unemployment, massive and increasing debt and a fractious political process. How in the world are we going to come together to address our perilous situation in a rational and timely manner?
Mr. Wolff believes that capitalism’s faults are too severe to be fixed with regulatory tweaks. He also agrees that socialism has proven to be unsuccessful where it has been tried. He proposes a new economic system of “Workers’ Self-Directed Enterprises” as an alternative.
I agree with Mr. Wolff that capitalism is in a crisis but I think that it can be repaired from within. The challenge is to simultaneously give our economy a sufficient boost to put millions of people back to work and to do this while dramatically shrinking our annual deficits in order to get our massive debt on a downward trajectory as a percent of GDP. How to do this is the main focus of my blog, day in and day out!
The author and lecturer, David Horowitz, has just published a little pamphlet,”Go for The Heart: How Republicans Can Win” describing how conservatives are being outmaneuvered on the campaign trail. “Year after year the Democrats’ campaign themes are monotonously familiar. They rely on scaring the voters by accusing Republicans of the same imaginary crimes: Republicans are a party that wages war on women, minorities, and vulnerable Americans. They don’t care about the vulnerable and the poor. Their policies inflict pain on working families to benefit the wealthy few.”
“ ’Caring’ is not one among many issues in a democratic election. It is the central one. Since most issues are complex and require too much information, voters care less about policy than about the candidates themselves. Above everything else they want to know who they can trust. Far more important to voters than a particular policy, they want a candidate or party who cares about them.”
“Behind Republican campaign failures lies an attitude that reflects an administrative rather than political approach to election campaigns. Such an approach focuses on policies for running the country and fixing problems rather than the political aspect of the electoral battle.”
In other words, fiscal conservatives must make a compelling moral case why it is so important to stop spending money that we don’t have.
By piling up more and more debt year after year, we are creating a huge burden for future generations. Is this the legacy we want to leave for our children and grand- children?
If we do not control the growth of entitlement programs, we are endangering their very existence. It’s ordinary people with average incomes who will need Social Security and Medicare when they retire. It’s our moral obligation to keep these programs sound for their sake!
Boosting the economy with lower tax rates has nothing to do with helping the rich. In fact, it’s the rich who benefit from the tax loopholes and preferences which must be eliminated to pay for these rate cuts to benefit the people who really need them!
Insisting on a work requirement for welfare recipients is demonstrating the tough love that they need to gain the dignity of becoming productive citizens. We need to give them a hand as well as a handout!
These are just a few examples of ways that conservatives can address the debt and deficit issues in a positive, and non-punitive, manner. Thanks to Mr. Horowitz I will attempt to take this approach consistently from now on.
The Congressional Budget Office has just issued the report ”The Budget and Economic Outlook: 2014 to 2024”, giving its usual objective and nonpartisan look at our prospects for the next ten years. My purpose today is to give a simple interpretation of its basic data. In my next post I will address the implications of this interpretation. The first chart above shows a forty year history of government deficit spending. The average deficit for this time period is 3% of GDP. From 1982 – 1987 the deficits were worse than this and from 2009 – 2013 they were much worse. The real problem is the accumulated deficits, i.e. the debt. The second chart above shows the public debt (what we pay interest on) all the way back to 1940 as a percent of GDP. As recently as 2008, the public debt was below 40% of GDP. Now it is 73% and climbing. This is very serious for two reasons. Right now our public debt is almost free money because interest rates are so low. But when interest rates return to their normal level of about 5%, interest payments will explode and be a huge drain on the economy. In addition, these CBO predictions assume continued steady growth of the economy. If and when we have a new recession or some other financial crisis, there will be much less flexibility available for dealing with it. Now look at the last two charts. The first one shows the rate of GDP growth since 2000 which has averaged about 2% since the end of the recession in June 2009 and is projected by the CBO to level off at this same rate over the next 10 years. This is an historically low rate of growth for our economy. The final chart shows the gradual decrease of the labor force participation rate over this same time period. These two graphs are related! When fewer people are working, the economy simply will not grow as fast.
High debt and slow growth are big problems for an economy. We’re falling more deeply into this perilous state of affairs all the time. We need to take strong measures to break out of this dangerous trap!
Yesterday’s New York Times has an article “Battles Looming Over Surpluses in Many States”, pointing out that “unexpectedly robust revenues from taxes and other sources are filling most state coffers, creating surpluses not seen in years and prompting statehouse battles over what to do with the money.” For example, in Kansas, Governor Sam Brownback is calling for full day kindergarten for all students. This raises a larger issue. The states are recovering from the Great Recession and have lots of money. We know that states spend money far more efficiently than the federal government, because states have constitutional requirements to balance their budgets. On the other hand, the federal government is hemorrhaging red ink at a frightening rate which will just keep getting worse indefinitely until strong measures are taken. It has taken on far too many responsibilities and spends money very inefficiently.
All of this suggests an obvious course of action to turn around a very bad situation. We should devolve as many federal programs as possible back to the states. Here are three good ones to start with:
Medicaid costs the federal government about $250 billion per year with another $150 billion being paid for by the states. The problem is that federal support is a fixed percentage of what the states spend. This makes Medicaid a very expensive program with no limit on the cost to the federal government. A good way to solve this problem is to “block grant” Medicaid to the states and let each state figure out the best way to spend its own federal allotment. Annual increases in the size of federal block grants could be tied to the rate of inflation in order to limit their growth.
Education spending at the federal level is a $100 billion per year (not counting student loans) item. Just at the K-12 level alone there are over 100 individual programs to which states and school districts have to apply for funds separately. Wouldn’t it make far more sense to “block grant” education funds back to the states so that this large sum of money can be spent more effectively and efficiently by targeting it at the biggest needs in each state?
Job-Training costs the federal government $18 billion per year for 47 different programs. Again it would be so much more sensible to block-grant job training funds to the states and measure effectiveness by the number of workers hired.
There really are relatively simple ways for the federal government to operate more effectively and at much lower cost. We need national leaders who are committed to getting this done.