As regular readers of It Does not Add Up know well, I am highly alarmed about the large budget deficits and slow economic growth in the U.S. in recent years. Some people respond that deficits are falling and that we have entered a new era of slow-growth secular stagnation which is unavoidable.
A new report from the Congressional Budget Office, our most reliable source for objective fiscal and economic information, now predicts that the deficit for 2016 will be $544 billion, a large increase over the $439 billion deficit for 2015. Furthermore, CBO predicts that for future years deficits will continue to grow, exceeding $1 trillion by 2022. Here is a summary of the CBO predictions:
Federal outlays are projected to rise by 6% this year, to $3.9 trillion, or 21.2% of GDP. This represents a 7% rise in mandatory (entitlement) spending, a 3% increase in discretionary spending, and a 14% increase in net interest on the national debt.
Under entitlements, Social Security payments will increase by 3% and healthcare (Medicare, Medicaid, CHIP (children’s health) and Obamacare) payments will increase by 11%.
Revenues will increase by 4% in 2016, to $3.4 trillion, or 18.3% of GDP.
Deficits are projected to increase from 74% of GDP in 2015 to 86% of GDP by 2026.
Spending for mandatory programs will increase from 13.1% of GDP in 2016 to 15% of GDP in 2026.
First Conclusion: The spending increases from 2015 to 2016, outlined above, illustrate a clear and alarming trend which is evident in the full ten-year set of CBO data. Discretionary spending will rise but at a sustainable rate of about 3% a year or less. Mandatory (entitlement) spending will rise at a much faster and unsustainable rate. It is healthcare spending, i.e. for Medicare, Medicaid, CHIP and Obamacare, and not Social Security, which is driving the rapid increase in mandatory spending. Second Conclusion: Although it is government healthcare spending which is driving our rapidly worsening deficit and debt problem, this is just part of the larger problem of the rapidly increasing cost of overall (including private) healthcare spending in the U.S. This is the basic problem we need to focus on to get both fiscal and economic policy back on the right track.
I have no antagonism for Barack Obama. He was elected because of the unpopularity of the Iraq War and George Bush who started it. He inherited the Financial Crisis and pulled us out of it without another depression. He has put us on the road to universal healthcare even though the structure of the Affordable Care Act does little to control costs. But overall, the negatives of his presidency outweigh the positives. Consider the situation we are currently in:
Stagnant Economy. The annual rate of growth of GDP since the end of the Great Recession in June 2009 has been an anemic 2% compared to our historical growth rate of 3% since the end of WWII. Although the official unemployment rate is down to a respectable 5%, there are millions of unemployed and underemployed people who have stopped looking for work. Obama and the Democrats in Congress have little interest in the tax reform and deregulatory measures which would boost economic growth.
Massive Debt. Our public debt (on which we pay interest) has doubled to over $13 trillion on Obama’s watch. As the Federal Reserve begins to raise interest rates to ward off inflation, interest payments on this debt will increase enormously. It is absolutely imperative to begin to substantially shrink our annual budget deficits. The Democratic Party, under his leadership, has expressed no willingness to do this.
Chaotic Middle East. The rise of ISIS in Syria, Iraq and North Africa, and the resulting refugee crisis in Europe is the result of weak U.S. leadership in the Middle East. Peace and stability depends on a strong U.S. presence in all trouble spots around the world. We neglect this responsibility at our peril.
Hyper-partisan Political Atmosphere. Stalemate in addressing these and other serious problems has led to the rise of extremist presidential candidates like Bernie Sanders and Donald Trump. Moderate candidates with successful experience in elected office are unable to gain political traction.
Our country is in a big mess. We are being guided by ideology rather than common sense. I am optimistic by nature. But it’s awfully easy to be pessimistic about our future.
“Your (last post) is one of the most active and positive that I have read of yours. You do put your time to where your values are. Those of us who see you as too economically focused and ourselves as more humanely concerned need to act as well. Thanks for your focus and attention.”
from a reader of my blog
I am a fiscal conservative and a social moderate. The primary reason I write this blog is because I am so concerned about the fiscal recklessness of our national leaders. Our national debt is much too large and still growing too fast. We need to either cut spending or raise taxes (or do both).
But I am also a social progressive. I voted in favor of Nebraska raising its minimum wage last fall. I support gay marriage as a civil right. I support having Nebraska expand Medicaid in order to cover more low-income people (where Medicaid needs to be fixed is at the federal level). There is in fact a very close connection between having a sound economy and social progress. As the above chart shows, the U.S. ranks very high in both GDP per person and social progress. All of the countries which are most socially progressive also have sound economies. This is not a coincidence.
My last post talks about what society can do to help blacks improve their socio-economic status. This includes improving educational opportunity in the inner city. But improved educational opportunity needs to be closely directed toward improved economic opportunity. This means, for example, having good jobs available for new high school and community college graduates. But this, in turn, means having strong economic growth with intelligent tax and regulatory policies to encourage entrepreneurship and business expansion.
In short, a sound economy is essential for social progress.
The Congressional Budget Office has a sterling reputation for collecting accurate data and making credible predictions about basic economic and fiscal trends. CBO analyses, which are based on current law, are generally accepted as valid by both liberals and conservatives. Considering the degree of hyper-partisanship in most discussions of fundamental policy, it is reassuring to at least have an unimpeachable source of basic information. CBO has just released its regular annual report, ”The Budget and Economic Outlook: 2015-2025.” There is good news for the near term. As shown above, GDP is projected to grow by 2.9% in the (budget) years 2015 and 2016, and dropping to 2.5% growth in 2017, which is still better than 2014. This means that our national debt will not grow from its current level of 74% of GDP for the next few years and might even decrease slightly. Growth will then hover around 2.2% for the remainder of the 2015 – 2025 decade, which is the average GDP since the end of the Great Recession in June 2009. Likewise, unemployment will likely not fall much below its current value of 5.6% for the next ten years. In short, under current policy, except for the next couple of years, we are stuck in the same slow-growth rut where we have been for the past five and one-half years.
It should be obvious that we need new policies to speed up growth, put more people back to work, and raise the stagnant wages endured by many middle- and lower-income workers. How can this be accomplished?
Tax reform, both individual and corporate, is the primary route to faster growth. Lower tax rates across the board, paid for by closing loopholes and shrinking deductions. This will put extra income in the pockets of the 64% of taxpayers who do not itemize deductions, which they will likely spend. It will also make it easier for potential entrepreneurs to successfully launch a new business.
Immigration reform, expanded foreign trade and deregulation will also create more business opportunities which will in turn grow the economy and create more jobs.
Hopefully the new Congress will be able to move forward in this direction. A better future depends on it!
The Washington Post reporter Robert Samuelson gives our economy today a B-, because the unemployment rate has inched down to 6.1%, fulltime employment is up to 105.8 million in 2013 from 99.5 million in 2010, and full-time women’s pay reached a high of 78% of men’s pay in 2013. The big negative, of course, is that median household income was $51,939 in 2013, down from $56,436 in 2007, just before the financial crisis.
The Bard College economist Pavlina Tcherneva, as summarized by the reporter Neil Irwin in yesterday’s New York Times, shows what has gone wrong with economic and monetary policy since the end of the Great Recession in June 2009. The American Recovery and Reinvestment Act of 2009 (an $850 billion stimulus package) did boost the economy but it primarily aided “the skilled, employable, highly educated, and relatively highly-paid wage and salary workers.” On the other hand the Federal Reserve’s quantitative easing policies have kept interest rates remarkably low and have thereby caused investors to buy stocks rather than bonds in order to get higher returns. This has artificially boosted stock prices and has been especially advantageous to the top 10% and, even more so, the top 1%. What is needed, according to Ms. Tcherneva, is a targeted, bottom-up approach to fiscal policy, which provides more and better paying jobs directly to middle- and lower-income wage earners. Her suggestion is for public works jobs, public service employment, green jobs, etc., all of which would require large infusions of federal money thereby worsening the federal deficit.
A much better approach would be broad based tax reform, lowering tax rates across the board, paid for by closing the loopholes and deductions which primarily benefit the rich. Since the 64% of taxpayers who do not itemize deductions would receive an effective pay boost, this would amount to a tax reform program targeted to exactly the middle- and low-income wage earners who have not yet recovered from the recession. These folks would most likely spend their extra income, thus further boosting the economy (see my previous post).
Several large U.S. companies have recently announced that they are planning to merge with foreign companies and move their corporate headquarters to a low tax country such as Ireland or Great Britain. The Obama Administration proposes to disallow such “tax inversions” by requiring that after such a merger at least 50% of the stock of the new company would have to be foreign owned. Otherwise the firm would still be considered American for tax purposes. Such a technical fix is unlikely to solve a much more fundamental problem.
As the latest issue of the Economist, “How to stop the inversion perversion,” makes clear, “America’s corporate tax has two horrible flaws. The first is the tax rate, which at 35% is the highest among the 34 mostly rich-country members of the OECD. … The second flaw is that America levies tax on a company’s income no matter where in the world it is earned. In contrast, every other large rich country taxes only income earned within its borders (a so-called ‘territorial system’). Here, too, America’s system is absurdly ineffective at collecting money. Firms do not have to pay tax on foreign profits until they bring them back home. Not surprisingly, many do not: American multinationals have some $2 trillion sitting on their foreign units’ balance sheets.” A relatively simple solution to this glaring problem would be to lower the corporate tax rate to 25%, the OECD average, and shift to a territorial system. Revenue losses would be offset by closing loopholes and deductions.
A better, but likely more controversial, solution would be to completely eliminate the corporate income tax and then tax dividends and capital gains at the same rate as earned income. This would avoid the double taxation problem whereby profits are taxed first at the corporate level and then again for individuals as dividends and capital gains.
The overall goal in this entire endeavor should be to boost the economy, thereby creating more jobs, and additionally to raise the tax revenue needed to pay our bills. Fairness is important but growth is even more important!
The publication of two new books is causing a reevaluation of the financial rescue and its aftermath, e.g. “The Case Against the Bernanke-Obama Financial Rescue”. The two books are “Stress Test” by Timothy Geithner, former Treasury Secretary, and “House of Debt” by the economists Atif Mian and Amir Sufi. Mr. Mian and Mr. Sufi maintain that the government’s response to the financial crisis should have focused less on saving the banking system and more on the problem of excessive household debt. They discovered in their research that, during the housing bubble, less affluent people were spending as much as 25 – 30 cents for every dollar of increase in housing equity. When the bubble burst, and housing prices started to fall, these borrowers cut way back on spending which caused many businesses to lay off employees. The authors propose setting up a government program to help borrowers decrease what they owe in underwater mortgages.
Five years after the end of the Great Recession it would still be very helpful to speed up our lagging economy. Here are three different possible ways to do this:
The Keynesians say the best way to stimulate the economy is with more government (deficit) spending. For example, spending several hundred billion dollars a year on infra-structure would create hundreds of thousands, if not millions, of new construction jobs. I think this is a good idea, but only if it’s paid for with a new tax (e.g. a carbon tax or a wealth tax).
The Mian/Sufi plan, as described above, would alleviate mortgage debt problems for millions of middle class homeowners who are still under water, encouraging them to spend more money which would in turn boost the economy. The problem is that the M/S plan creates a moral hazard for mortgage holders unless it’s paid for by mortgage insurance which would raise costs for borrowers.
Broad-based tax reform, with lower tax rates for everyone, paid for by closing loopholes and limiting tax deductions for the wealthy, would automatically put more income in the hands of the two-thirds of tax payers who do not itemize deductions. These middle class wage earners would tend to spend this extra money thereby boosting the economy.
The point is that there very definitely are ways to boost the economy, some better than others, and it should be a top priority of Congress and the President to get this done.