Category Archives: economy, fiscal policy

Looking for Help!

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America is in a tough position at the present time, both economically and fiscally.  Our economy is stuck in a slow growth mode of 2% per year, ever since the end of the recession four years ago.  The unemployment rate, now 7.6%, is dropping only very slowly which means many millions of people are either unemployed or underemployed.  Our national debt, now almost $17 trillion, is still growing rapidly.  As interest rates increase and return to normal levels, as they may be starting to do already, just paying the interest on this enormous debt load will take an increasingly large portion of government revenues in the years ahead.  At the same time entitlement spending, on Social Security, Medicare and Medicaid, is also increasing rapidly.  It is absolutely essential for our national leaders to strongly focus on finding solutions for these escalating problems and only a few of them, but not nearly enough, are making a concerted effort to do this.
I am trying to do something about these critical and urgent problems.  First of all, I challenged the incumbent Congressman for Nebraska’s Second District, Lee Terry, in the Republican Primary in May 2012, but to no avail as he was easily re-nominated and then re-elected in November 2012.
After the 2012 elections I set up a blog: https://itdoesnotaddup.com/ to address these critical national issues and to propose ways of addressing them.  There are over fifty individual posts by now which go into much detail on possible actions that could be taken at the national level to make more progress on all of these matters.  But I need to reach a wider audience and to create a greater sense of the eminent danger we are in if we don’t take our current situation more seriously.
I have employed a graphic designer to come up with a new and more exciting logo and website to hopefully create more visibility for what I am doing.  Take a look: http://thebudgetjack.com/.  I am also looking for one or more people to help out with new content for the new website.  Perhaps it could be authoring a separate but related series of blog posts on these same issues.  Or perhaps by contributing a new feature to the website which would never occur to me on my own.
If you have any ideas about any of these things, please let me know.  I am easy to reach at jackheidel@yahoo.com. I look forward to hearing from you!

Fiscal Fixes for the Jobless Recovery

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The economist Alan Blinder has a column in yesterday’s Wall Street Journal entitled “Fiscal Fixes for the Jobless Recovery” where he deplores the apparent complacency about our stubbornly high unemployment rate of 7.6% after four years now of recovery from the Great Recession.  His solutions: 1) boost government employment with greater deficit spending, 2) offer businesses a tax credit equal to 10% of the increase of their wage bills over the previous year, and 3) offset the high 35% corporate tax rate by taxing a company’s repatriated profits at a super low rate, based on the increase of its wage payroll.
What Mr. Blinder describes as complacency about the high unemployment rate is rather just huge frustration about the likelihood of a divided Congress being able to reach agreement on any fundamental reforms which would be able to boost economic growth.  His proposals illustrate why the philosophical chasm between the two political parties is so great.  In the first place, boosting government employment by increasing deficit spending is a total nonstarter.  Our enormous and rapidly increasing national debt is a major part of the problem.  We need to decrease government spending, not increase it.
We need to simplify the tax code, not make it more complicated with a new 10% tax credit.  Lowering tax rates overall, offset by eliminating special tax preferences for the well connected, is the type of fundamental reform which will truly boost the economy, by giving everyone the same greater opportunity to create wealth.
Since Republicans think that a 35% corporate tax rate is too high and Democrats think that too many companies are able to shelter their profits abroad, then why can’t we just lower the rate and change the rules to the point where multinational corporations will want to bring their profits home, pay taxes and reinvest in America.  A new tax credit just makes things more complicated!
What is needed to break the log-jam is leadership from our elected representatives, not more ideological name calling.  There are practical solutions to our economic and fiscal problems if we simply had more leaders who are focused on finding solutions rather than scoring points on the opposition!

After the Crisis: The Power Inversion and What It Means

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In today’s New York Times David Brooks has a column “The Power Inversion”  describing a shift of economic and political power from the federal government to municipal governments.  Of course, the rural to urban population migration has been taking place for many years.  But now the financial crisis and resulting political stalemate in Washington is causing civic leaders to take more initiative in addressing economic problems.  The Brooking Institution’s Bruce Katz gives many specific examples of such initiatives in a recent speech “After the Crisis: The Metropolitan Revolution”.
This shift of power away from Washington and back to local government could have big ramifications for the federal budget which, as almost everyone knows, is currently running huge deficits.  Here is a good example to start with.  The U.S. Senate is about to take up revision of the No Child Left Behind law which expired several years ago.  A bill, Strengthening America’s Schools, has been introduced by the Democratic majority for this purpose.  It allows states to create their own education reform plans and sets testing and performance standards for all states to follow.  It is much more flexible than NCLB.
Congress should take this opportunity to reorganize the federal Department of Education by greatly consolidating its huge number of individual programs (over 100 separate programs in K-12 education alone).  Support for state education programs could be given in much larger chunks thereby giving states and school districts more leeway in figuring out the best way to divide up and allocate their education dollars.  The total federal budget for education could be significantly reduced in this way and the states will, at the same time, be able to do a better job with fewer dollars because there will be fewer strings attached.
This is a smart way to shrink the federal deficit and we should take advantage of it!

Colonoscopies Show Why American Health Care is So Expensive

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Yesterday’s New York Times has an excellent article, “The $2.7 Trillion Medical Bill”, which uses a detailed analysis of the cost of colonoscopies to show why American healthcare is so expensive.  In the U.S. an insurance company pays about $3500 – $4000 for a colonoscopy compared with the cost for the procedure in Europe of between $400 – $800.  Also the price can vary enormously, from as little as $665 (in Utah) to as much as $8577 (in New York City).  There are all sorts of reasons for this huge variation in cost, for example, whether or not an anesthesiologist is used as well as a gastroenterologist, and whether the procedure is performed in a surgical center rather than in a doctor’s office.
The basic problem, of course, is that in the U.S. nobody is sufficiently responsible for the bottom line.  The patient isn’t responsible because the bill is paid by the insurance company.  The insurance company negotiates with healthcare providers but the insurance premium is paid by the patient’s employer.  If the insurance company has to pay too much in claims one year, then it just raises insurance premiums for the following year.
The problem is getting so serious that it will soon have to be dealt with in a comprehensive way.  There are essentially two different ways to proceed.  One is to have a single payer system like most of Europe and Canada.  Healthcare would be tightly controlled by the federal government which would set prices and ration care.  The cost of healthcare would be controlled but we’d be giving up a great deal of personal freedom in return.  Basically it would amount to expanding Medicare into a rigidly prescribed national healthcare system.
The alternative is to adopt a new payment system which makes each of us directly responsible for the cost of our own healthcare.  The best way to accomplish this is to remove the tax exemption from employer provided health insurance.  Health insurance could still be provided by an employer but it would be considered a part of total salary and be taxed as such.  Then the employee, as well as any self-employed person, would have a direct personal stake in setting up an efficient health insurance plan to keep the cost of healthcare under control.
Americans put great emphasis on personal freedom and responsibility and I believe that most of us would prefer this latter free market approach to healthcare rather than a single payer system like what most of the rest of the world has!

What is America’s Biggest Problem?

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I’d like to do things differently on Memorial Day and ask you to say what you think our biggest national problem is at the present time.  If you have been following this blog for a while, you can probably guess what my own answer is.  But I will not answer directly, at least not yet.   However I will respond to your comments and give you my take on your answer.  Later on I’ll give you my own answer to the question. I hope to hear back from you!

A Frightening New Look at the U.S. Debt Problem

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Let’s take another look at the Congressional Budget Office’s “An Analysis of the President’s 2014 Budget”.  On May 18, I pointed out that his budget projects a deficit of “only” 2% ten years from now in 2023, which amounts to a $542 billion deficit in that year, quite a large amount.
There is actually a clearer and rather frightening way to look at the continuing buildup of debt over the next ten years according to the President’s budget.  On page 4 of the CBO report, year by year projections are given for each of the following: Debt Held by the Public (on which interest is paid), Gross Domestic Product, Net Interest on the Public Debt, and Net Interest as a Percentage of GDP.  The actual amounts for 2012 are: $11.3 trillion in Public Debt, $15.5 trillion GDP, $220 billion Net Interest and 1.4% Net Interest/GDP.  These figures all steadily increase during the next 10 years with projected values for 2023 being: $18.1 trillion in Public Debt, $25.9 trillion GDP, $782 billion Net Interest and 3.0% Net Interest/GDP.
Here’s what is so frightening.  Right now we’re paying 1.4% of GDP as debt interest but GDP is itself growing at about 2%.  So we at least have a small net growth of .6%.  But the 1.4% interest for 2012 and 2013 is projected to keep growing steadily and reach 3% in 2023 and then to continue on growing indefinitely after that.  This means that either our growth rate continues to steadily increase and hits at least 3% by 2023, and then still goes even higher after that or else our economy will begin to stagnate and go backwards.
We are currently on a perilous course, caused by the enormous accumulation of debt over the past few years, on which we will have to pay interest in perpetuity.  It is an urgent matter to rapidly shrink deficit spending way down close to zero in the next few years.  We need to find more effective ways to boost the economy than the excessive public stimulus which has put us into this dreadful current situation.

Income Inequality and What to Do About It

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In yesterday’s New York Times Timothy Noah has a column in The Great Divide series “The 1 Percent Are Only Half the Problem” in which he makes the case that there are two different types of inequality which society needs to address.  First, the income gap between the top 1% and the bottom 99% is getting wider and wider.  But there is also a skills gap between the (college) educated class and those whose education ended in high school.
What can and should be done about these two different aspects of inequality in America?  Controlling the excesses on Wall Street in order to avoid future bailouts will help control the wages of the top 1%.  This is already being done with the Dodd-Frank financial reforms and current efforts to require the biggest banks to hold more capital reserves.
But much more could be done.  Unfortunately, the main effect of the Federal Reserve’s low interest rate policy is to drive up the stock market which favors the more affluent.  Broad based tax reform which would lower tax rates by eliminating unjustified tax breaks for the rich would do much more to stimulate faster economic growth and give a big boost to middle class incomes.
The huge and rapidly growing cost of employer provided health care (now averaging about $5000 annually for individual coverage and about $14,000 for family coverage) is having a huge negative impact on middle class wage growth.  The U.S. spends twice as much of GDP, about 18%, on healthcare as any other developed nation.  Reforming employer provided health insurance by removing the tax exemption (and replacing it with lower tax rates) would get each of us personally involved with controlling healthcare costs.
The skills gap is driven by globalization and the advance of technology and is not going to disappear.  The only way to address it is by improving educational outcomes.  Putting more emphasis on early childhood education (ages 0-5) will help as well as making college more accessible and affordable.  Online education and especially Massive, Open, Online Courses (MOOCs) will help in both respects.  Hopefully more and more students and families will come to realize that there are many attractive alternatives to very expensive and elite residential colleges and universities.  It is not necessary to be wealthy or to borrow lots of money to attend college!
Conclusion:  inequality in American society is a large and growing problem.  But there are effective ways for both policy makers and individuals to respond.

CBO Analysis of the President’s 2014 Budget

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The Congressional Budget Office has just released “An Analysis of the President’s
2014 Budget”.  News reports highlight that the Obama plan will decrease the deficit over the next ten years by $1.1 trillion compared with the CBO baseline and that the
deficit in 2023 will be only 2% of GDP as opposed to 4.2% of GDP in 2013.  Federal debt held by the public (on which we pay interest) would grow from 73% of GDP ($11.3 trillion) at the end of 2012, to 77% of GDP ($12.8 trillion) at the end of 2014, and then shrink to 70% of GDP ($18.1 trillion) in 2023.
It may sound good to say that the deficit will be “only” 2% of GDP in 2023.  But this still represents about $600 billion being added every year to the national debt even 10 years from now.  Right now, with very low interest rates, we are paying $223 billion per year (8% of revenue) in interest on the debt.  When interest rates return to normal at 5% or so, interest on the debt will skyrocket, reaching $900 billion by 2023, representing 18% of the estimated $5.1 trillion in revenue for that year.  Just paying interest on the debt
will become a bigger and bigger burden for American society, continuing indefinitely into the future.
Here’s another problem with the President’s budget.  Almost half of the ten year deficit reduction ($493 billion) is achieved by limiting tax deductions to 28% of income (the tax
rate on income up to $183,000).  Using a limitation of tax deductions to shrink the deficit will make fundamental tax reform that much harder.  There is a strong bipartisan consensus for broadening and simplifying the tax code which means lowering, if not completely eliminating, many deductions in return for lower tax rates.  This should be the primary focus of tax reform in order to stimulate the economy by encouraging
more investment.
What we need is a credible plan to completely eliminate deficit spending in the
short term, and to do this together with pro-growth tax and regulatory reform.  It will be a huge challenge to get this accomplished but our future liberty and prosperity depend on it!

Updated Budget Projections from the Congressional Budget Office

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The Congressional Budget Office has just released an update to its February 2013 Budget Projections.  The deficit for 2013 is now projected to be $642 billion, down from the previous $845 billion.  This is good news but its main effect will only be to delay by several months until fall serious negotiations about raising the debt limit again.  The long term outlook has changed very little.  New debt for 2014-2023 is now projected at $6.3 trillion.  The total debt this year will be 76% of GDP and in 2023 it is projected to be at 74% of GDP and rising.  Over the past 40 years total debt has averaged 39% of GDP.
Such a large debt level now and for the indefinite future obviously has very serious negative consequences.  As soon as interest rates return to more typical higher levels, interest payments will rise by hundreds of billions of dollars per year, crowding out much other spending.  We can be sure that a new crisis will occur sooner or later leaving national leaders at that time in a precarious position, unless the debt level shrinks significantly in the meantime.
This means that significant additional deficit reduction is still needed at the present time.  Realistically, it should come from reforming entitlement spending which is becoming an even bigger driver of our continuing debt explosion.  Any national leader who denies the seriousness and urgency of our current frightful fiscal condition should be considered irresponsible and held to account for this failing.
The presently high unemployment rate of 7.5% is no excuse for inaction.  The way to boost the economy, and thereby reduce unemployment, is to encourage more business investment with tax and regulatory reform.  Economic stimulation and deficit reduction are not in opposition to each other.  They can and should be addressed together at the same time.

The New York Times and Fiscal Austerity

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The New York Times is devoting a lot of space recently to debunking the Republican’s supposed campaign to inflict fiscal austerity on the United States.  My May 10, 2013 blog entry responded to an NYT article on May 9 entitled “Emphasis on Deficit Reduction Is Seen by Economists as Impeding Recovery”.  Now they’re at it again!  Today there’s an Op Ed entitled “How Austerity Kills”, by David Stuckler and Sanjay Basu.  The authors state that “Recessions aren’t necessarily deadly.  But harsh spending cuts are”.
It needs to be pointed out over and over again, as often as necessary until it sinks in, that the current year’s federal budget does not represent a cut.  In 2012 actual expenditures were $3,538 billion while the 2013 federal expenditure budget, as estimated three months ago (in February 2013) by the Congressional Budget Office, is $3,553 billion.  This represents an increase of $15 billion from last year’s (2012) expenditures to this year’s (2013) estimated expenditures.  Holding down budget increases from one year to the next, at a time of enormous deficits, is exactly what our elected representatives ought to be doing.  If Mr. Stuckler and Mr. Basu want to argue that the sequester adjustments represent a poor way of holding back on large spending increases, then many Republicans, including myself, would agree with them.  Let’s definitely reduce spending increases in a more intelligent way!
But the larger issue is the question of austerity itself.  We’ve now had four years in a row of trillion dollar deficits and this year’s deficit is predicted by CBO to be $845 billion.  CBO projects deficits of $616 billion for 2014, $430 billion for 2015, and then annual deficits which start growing again (under current policy) and returning to the trillion dollar level by 2023.  This represents $7 trillion in additional debt by 2023 beyond the $6 trillion in debt already accumulated in the last five years.  To continue on this projected path is the height of irresponsibility!  And for the New York Times to refer to this amount of excessive spending as austerity is ludicrous, simply ludicrous!