Category Archives: deficit

Cutting the Federal Budget, an Example: The Highway Trust Fund

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As an advocate of cutting federal spending, people sometimes ask me exactly what I would cut to save money and lower the deficit. I have two standard answers to this question:

  • Often I will respond, it is up to Congress to figure this out. The important thing is to shrink the deficit one way or another. It doesn’t matter from a fiscal point of view exactly what is cut.
  • Another answer I like to give is that with the sequester already slowing down discretionary spending, we should concentrate on finding savings in entitlement programs like Social Security, Medicare and Medicaid.

While both of these answers have validity in a general sense, nevertheless I do look for ways to cut back on discretionary spending as well. Here is a good idea from Reason magazine’s Veronique de Rugy, “Let States Build Their Own Highways.” The rationale is very simple. The federal gasoline tax of 18.4 cents/gallon brings in about $40 billion per year which goes into the Highway Trust Fund. But the HTF is spending $53 billion per year, meaning that federal gas tax revenue is being supplemented by $13 billion from general revenues. This additional $13 billion per year can be viewed as an unjustified federal expense merely adding to the deficit.
Capture2The way to address this issue is to:

  • Abolish the federal gasoline tax of 18.4 cents/gallon as of some specific date in the future, say in a year from the time such a law is enacted.
  • Turn over all responsibility for highway construction to the states.
  • States can then decide individually how much of the federal gasoline tax they wish to continue as a state gasoline tax in order to finance their own highway funding.
  • Minimal federal guidelines could be maintained if desired to insure uniform quality control by the states.

Of course, a $13 billion annual budget savings could be looked at as a drop in the bucket, not nearly large enough to make a sizable dent in the federal deficit (latest projection for fiscal year 2015: $426 billion). That would be too cynical. There are undoubtedly many other smart ways to cut back federal spending. I am constantly looking for them!

The Six Issues That Could Cause a Government Shutdown

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It is now just ten days until the new government fiscal year begins on October 1 and Congress has not yet passed a budget for the new fiscal year. Although a temporary funding bill could be brought up and passed at any time, the Washington Post thinks that there are six big impediments to adopting a new budget.
CaptureThey are:

  • Planned Parenthood. 31 House Republicans insist that they will support no spending bill which has funding for Planned Parenthood. Short term funding should not be in danger because the Democrats will step in if necessary to keep the government open.
  • The Sequester. This is a much tougher issue because the Democrats want to break the 10 year Sequester spending limits. It’s the Republicans strongest leverage and they should insist on dollar for dollar spending cuts elsewhere in order to relax the Sequester cuts.
  • A Challenge to Boehner. The anti-Planned Parenthood caucus is threatening to try to oust John Boehner as Speaker if they don’t get their way. Hopefully the Democrats would help to keep Boehner because any replacement would be more conservative and less accommodating to them. I personally think that John Boehner is a miracle worker given the hyper-partisanship in Washington at the present time.
  • The Iran Nuclear Deal. Republican desire to express opposition to the Nuclear Deal could surface as a bargaining chip in budget negotiations. As bad as the Nuclear Deal is, this is a bad budget strategy.
  • The Export-Import Bank. The Ex-Im Bank expired in June. Its supporters might try to refund it as part of a budget deal for next year. It should be allowed to die unless it undergoes reform to remove subsidies for big businesses such as Boeing and GE.
  • The Highway Trust Fund. The problem is that the 18 cent/gallon federal gasoline tax is insufficient to fund our infrastructure needs. The most sensible approach is to raise the gas tax by a few cents per gallon. Attempts to provide funding from other sources should be resisted.

 

Bottom Line: Republicans should be flexible except on overall spending limits. It is absolutely essential to the future wellbeing of our country to strongly focus on eliminating budget deficits.

Jeb Bush’s Tax Plan: Both Good and Bad

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Republican presidential candidate Jeb Bush has just released his tax reform proposal, “My Tax Overhaul to Unleash 4% Growth.” It has many good features such as:

  • Lowering and consolidating seven current tax brackets into three: 10%, 25% and 28%.
  • Essentially doubling the standard deduction for most filers, thereby achieving huge simplification for millions of average income filers.
  • Eliminating the state and local income tax deductions and capping all others, except for charitable deductions, at 2% of Adjusted Gross Income.
  • Doubling the Earned Income Tax Credit for childless filers, thus encouraging more low income people to work.
  • Exempting taxpayers over the age of 67 from the employee-side payroll tax, encouraging them to stay in the workforce longer.
  • Cutting the corporate tax rate from 35% to 20%.
  • Allowing 100% immediate expensing for all capital investments, including inventories.
  • Creating a territorial tax system so that multinationals are not taxed on foreign earnings, and therefore incentivized to bring their foreign profits home.
  • Eliminating the deductibility of interest expenses.

The lower individual and corporate tax rates, together with the separate investment and work incentives, will create a significant economic stimulus estimated to raise GDP by at least .5% per year or higher, depending you who ask.
According to the Tax Foundation, however, the plan would reduce federal revenue on a static basis by $3.66 trillion over ten years, and even by $1.6 trillion on a dynamic basis, taking into account the new tax revenue generated by the plan.
CaptureThis is, of course, a huge problem. We badly need to speed up economic growth but we also need to lower, not increase, our annual deficit spending in order to put our debt on a downward path as a percentage of GDP.
The resolution of this quandary is to tighten up on those deductions, such as for mortgage interest, remaining in the code and also lessening the amount of the tax cuts if necessary in order to achieve overall revenue neutrality for the plan.

Paul Krugman: “Debt Is Good”

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Every Monday and Friday morning when I pick up the New York Times, I immediately turn to the OP-ED page to see what liberal icon Paul Krugman is saying. In his most recent column, “Debt Is Good,” he says that “what ails the world economy right now is that governments aren’t deep enough in debt.”
CaptureHere is my response to his argument:

  • “The federal government can (now) borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future.” Our public debt (on which we pay interest) is now $13 trillion or 74% of GDP, the highest since the end of WWII, as shown in the above chart from the Congressional Budget Office. It is likely that interest rates will soon begin to go up. Every 1% rise will increase interest payments on our already existing debt by $130 billion per year. Where are the hundreds of billions of new dollars for debt service going to come from in an already tight budget? The more we add to the debt, the worse this problem will become.
  • “Having at least some government debt helps the economy function better.” I agree! But $13 trillion is way beyond what is needed for this. It is outrageously excessive!
  • “What we need are policies that would permit higher (interest) rates in good times without causing a slump. And one such policy would be targeting a higher level of debt.” The problem here is the conceit of Keynesians, like Mr. Krugman, that monetary policy alone can restore us to economic and fiscal health. Rather than accepting that the economy has entered a “new normal” with a permanently slow growth rate of about 2% (as has been the case since the end of the Great Recession in June 2009), we need policy changes such as individual and corporate tax reform (revenue neutral to be sure) and changes in the Affordable Care Act and Dodd-Frank Act to remove their job killing features.

 

Anybody with an ounce of common sense knows that excessive borrowing will eventually lead to disaster. Mr. Krugman seems to think that by constantly ridiculing his opponents, he can get away with denying this simple truth.

A Vivid Example of Fiscal Irresponsibility at the Federal Level

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An article in the Friday, August 14 edition of the Omaha World Herald, “Why are the BRT stations so expensive? Officials explain the $260,000 price tag,“ describes a new $30 million bus rapid transit plan for Dodge Street with 27 individual sleek, modern bus stop shelters along the route at a cost of $260,000 each.  Half of the new $30 million plan will be paid for by the city of Omaha and half by the Federal Transit Authority which has an annual budget of $8.6 billion.
Capture1 The issue is not whether Omaha should spend $15 million in local funds to achieve a $30 million bus system upgrade. We can expect city officials to make a responsible decision on this matter. The real issue is why the FTA should have annual budget of $8.6 billion to begin with when it is paying for, and therefore encouraging, extravagantly designed bus transit systems all over the country.
CaptureThe U.S. deficit for the 2015-2016 budget year, ending on September 30, is predicted to be about $450 billion dollars. This adds to the approximately $13 trillion public debt (on which we pay interest) which, at 74% of GDP, is the highest it has been since the end of WWII (see the above chart from the Congressional Budget Office).
It is the responsibility of Congress and the President to figure out how to get the budget under better control. All aspects of federal spending can and should be tightened up, including entitlements (Social Security, Medicare and Medicaid) and discretionary spending (everything else).
The Federal Transit Administration is wasting money on unnecessarily extravagant bus transit systems. Such fiscal irresponsibility means that its budget should be cut significantly. Many other similar examples exist in the federal government. We need people in Congress who can identify these fiscal boondoggles and effectively agitate for needed cutbacks.

How to Avoid a New, and Much Worse, Financial Crisis

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Is it possible for the U.S. to effectively address its enormous debt problem in today’s contentious political environment? Two weeks ago I discussed in “America’s Fourth Revolution” why the political scientist James Piereson thinks this is impossible. He is very persuasive but I think he is too pessimistic.
CaptureSince then I have discussed several different things we should do to turn around this perilous situation:

  • If spending for just Medicare and Medicaid (two very expensive entitlement programs) alone fell by 25% over ten years, as a percentage of GDP, and then stayed in line with GDP after that, the U.S. would actually have a budget surplus in 2040.
  • Just recognizing the magnitude of our debt problem would do wonders in public awareness.
  • If the Tea Party were able to grow beyond a protest movement and unite the country behind a majoritarian agenda of work, mobility and opportunity, it would be much more effective in achieving its fiscally conservative goals.
  • Another significant way to save money, and get better results at the same time, is to turn over more and more programs to the states. A good way to do this is with block grants to the states for federal programs in such areas as welfare, education and Medicaid. This would give the states more flexibility to get the job done in an efficient and cost saving manner.

What we need to do to turn our debt situation around is to greatly shrink our annual deficits below their current level of about $450 billion per year. If the debt is growing slower than the economy, then it will shrink as a proportion of the economy. This is what happened after WWII (see above chart) and it needs to happen again now!

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!

Prominent Myths about Our National Debt

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As the 2016 presidential election contest begins to heat up, the Committee for a Responsible Federal Budget and its outreach arm, Fix the Debt, have issued a new “Fiscal FactChecker: 16 Budget Myths to Watch Out For in the 2016 Campaign.”  Here are four of the major myths:

  • 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.”

    Capture4

  • 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?

Fix It Now: the Political Philosophy of Chip Maxwell

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I have just recently come across the book, “Fix It Now: Rediscover the Constitution and Get America Out of Its Fiscal Death Spiral” by Chip Maxwell, a candidate for Congress in Nebraska’s Second District May 2016 Republican Primary.
Chip lays out his political philosophy very clearly.  It is to:

  • Adopt a Balanced Budget Amendment to the U.S. Constitution, phased-in over ten years.
  • Phase out Social Security and Medicare for those under age 55.
  • Dismantle over the next decade the rest of the federal welfare/entitlement system.
  • Provide social services at the state or local level.
  • Launch a national effort to build a majority in Congress of crusaders for limited government.
    Capture1There are some attractive features to Chip’s program but overall I think it is too radical to have much chance at implementation.
    I am very much in favor of a balanced budget amendment and a ten year phase-in period is quite reasonable. Furthermore, providing social services at the state and local level would be much more efficient than what we are currently doing and, even with federal support, would be a big help in balancing the budget.
    Social Security and Medicare are lifelines for tens of millions of people. We can and should strengthen these programs in order to make them more financially viable for future retirees. They are now part of our national fabric and are here to stay.
    Chip’s last principle, promoting limited government, has much appeal but I think is not practical in this day and age. From my perspective, simply passing a Balanced Budget Amendment is sufficient to do what is needed. A BBA will force Congress to set spending priorities and eliminate inferior programs.
    Chip Maxwell is to be commended in running for Congress. If elected, he would move the needle in the right direction, even though some of his ideas wont work.

The Moral Case for Free Enterprise

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Capitalism is under attack around the world as Greek socialists complain about their hard- hearted EU creditors, American liberals such as Bernie Sanders and Elizabeth Warren push the Democratic Party to the left, and Pope Francis compares the excesses of global capitalism to the “dung of the devil.”
CaptureOne of my favorite economic commentators is Arthur Brooks, President of the American Enterprise Institute.  One of his books is “The Road to Freedom: How to Win the Fight for Free Enterprise,” which examines the most important economic issues facing the United States from a moral point of view.  For example:

  • Getting the U.S. Economy Growing Again. Weak economic growth means the end of opportunity in America. Furthermore, weak growth disproportionately hurts those who most need new economic opportunities: the poor. One strategy says that the key to restarting economic growth is the state: more stimulus, more taxes, more borrowing. A second strategy says the source of economic growth is free enterprise: tax reform, less government regulation, policies that make it easier for entrepreneurs to succeed, and a smarter immigration policy.
  • Putting America Back to Work. Jobs are not just a source of money for Americans; they are a ticket to earned success. High unemployment is unfair because it robs people of their potential fulfillment. It is especially harmful to the poor and the young. The key to job creation is to get the economy growing faster.
  • Getting the United States Out of Debt. Unless the U.S. reduces deficits, it will have just three choices: steal from future generations, inflate the currency to lower the value of the debt or refuse to pay those to whom it owes the money. All of these options are immoral because they are unfair: they harm others who have done no harm to America. Three points here: 1) we have out-of-control entitlement spending, 2) debt crises are more successfully dealt with through spending reductions than with tax increases and 3) there are no quick fixes.

Considering basic economic and fiscal issues from a moral perspective adds an important new dimension to the discussion.  We might disagree on the details of how to proceed but it is imperative to take effective action of some kind!