Category Archives: economy, fiscal policy

Budgeting 101: Don’t Forget Hauser’s Law!

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In 1993 the investment analyst W Kurt Hauser pointed out that “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.”  Hauser’s Law of course is really just an empirical observation which is referred to as a “law” because it has been so amazingly consistent since 1945.  Some economists use Hauser’s Law to argue that there is no sense in raising tax rates because higher rates won’t really raise additional revenue over time.  To the extent which Hauser’s Law is accurate, the only way to significantly increase tax revenue is to grow the economy faster.

However Hauser’s Law is also quite relevant in figuring out how much money the federal government should be spending in a given year.  If revenues are limited to 19.5% on average over time, then overall spending should also be approximately limited to 19.5%, or else there will be a negative balance, i.e. a deficit.  If there is a large imbalance year after year, as during the past few years, then the national debt will grow rapidly and become the huge problem that it is today.

In this respect, take a look at John Taylor’s March 17, 2013 entry in his blog Economics One entitled “An Opportunity to Contrast and Compare Budgets”.  The Republican House Budget rapidly (over two or three years) brings federal spending down below 20% of GDP and then levels it off at about 19.5% after that.  On the other hand, the Democratic Senate Budget brings spending down to about 21.5% in 2017 and then it creeps back up to 22% by 2023.  This is why the House achieves a balanced budget in ten years while the Senate budget doesn’t even come close to achieving balance.

Can there be any question as to which of these two budgets is the more fiscally responsible?  To me it is obvious but if you feel otherwise please do say so in the comment section which follows this entry.

Are the Democrats Really Serious?

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In the March 18, 2013 edition of the Wall Street Journal, longtime Democratic party activist, Ted Van Dyk, essentially asks the above question in his op-ed column, “My Unrecognizable Democratic Party” . Mr. Van Dyk gives many examples of the lack of seriousness of the current national Democratic leaders.
One glaring example which he omits is the enormous difference between the recently proposed House Republican budget, which eliminates deficit spending over a ten year period, and the Senate Democratic budget, which makes no such attempt or even expresses any interest in doing so. The proposed Democratic budget actually increases the national debt by $5 trillion over the next ten years and ends the decade with annual deficits of over $500 billion dollars (see my previous post).
We have added $6 trillion in national debt over the past five budget years, 2009 – 2013, and the Democratic Senate proposes to add another $5 trillion over the next 10 years, with no end in site! How irresponsible can you be! How will this enormous new debt ever be paid off? What will happen when the Federal Reserve is forced to raise interest rates to combat the inevitable inflation which will arise from prolonged quantitative easing? When our public debt reaches $20 trillion, which will soon happen under Democratic budgeting, even an interest rate of 5% will require $1 trillion of interest payments per year forever!
It doesn’t take a lot of common sense to understand the painful fate awaiting our country if this scenario plays out. It is no consolation to predict that a conservative revolution will sweep across the country as a reaction to such irresponsible behavior from the Democrats. It would be far better for Democratic leaders to wake up and address our dire fiscal predicament before it gets even worse. Will this happen? Will Democrats heed Mr. Van Dyk’s warning? Let’s hope so!

Comparing the House and Senate Budgets

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The Republican House of Representatives and the Democratic Senate have each in the past few days issued 10 year budget proposals.  The Heritage Foundation has neatly and dramatically summarized the huge differences between these two budgets and the visions they convey for the future of our country in the coming years.

By limiting the growth of spending to 3.4% per year for the next ten years, the Republican budget shows that it will be possible to shrink the deficit down to zero by 2023 and restore the sound fiscal policies which have guided our country for most of its history.  On the contrary, the Democratic budget projects 5% increases in spending for the next ten years and ends the next decade with annual deficits in the neighborhood of $600 billion.

In other words, a little bit of fiscal restraint, i.e. holding year-to-year spending increases to 3.4%, is all that it will take to get the U.S. back on a sound fiscal track.  What is so difficult about achieving such a common sense approach to budgeting?  If the Obama administration, or perhaps the Senate majority, wants to start new programs on early childhood education or green energy research, for example, then all it has to do is reduce spending elsewhere in the federal budget now approaching $4 trillion annually.

Fundamentally, in the final analysis, adopting a reasonable budget and sticking to it, is a moral issue.  Living within one’s means is such basic and transparently obvious good sense that the advocates of such a policy will ultimately prevail.  For the time being at least, the Democrats are ceding the high ground to the Republicans.

Why is Healthcare so Expensive?

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Time Magazine has just published its longest article ever, a 25,000 word piece by Steven Brill, entitled Bitter Pill: Why Medical Bills Are Killing Us.  The article contains one example after another of outrageous medical bills being charged to people who are the least able to pay, either the indigent or the uninsured.  Mr. Brill’s solution to this horrible mess is for the government, i.e. the bureaucracy now being expanded by the Affordable Care Act, to do a much better job of using its clout to control costs.

But there is another point of view about what is wrong with our healthcare industry and what can and should be done to make it far more efficient and enable it to provide us with quality care at a much lower cost.  David Goldhill provides a roadmap to a consumer-driven healthcare system with his new book, Catastrophic care: How American Health Care Killed My Father and How we Can Fix It. 

Mr. Goldhill’s proposal is to introduce true competition, not quasi competition dictated by over-burdensome bureaucratic rules, into the American healthcare system.  In other words, let the marketplace figure out what works best by trial and error, rather than expecting even the brightest and most well-meaning experts to be able to figure it out a-priori.  There would still be massive government sponsored programs, such as cradle-to-grave catastrophic insurance and mandatory health accounts, to provide universal care for all.  But the myriad details would be left to the consumers and providers of healthcare to work out over time.

The healthcare crisis in the United States is not just about controlling the rapidly increasing costs of Medicare and Medicaid, as serious as this problem is.  It is also about controlling the costs of private healthcare which is retarding the growth of prosperity for the entire middle class.  Fundamentally we have two basic ways to proceed. We can either move toward a single payer government run program, like much the rest of the developed world, or we can set up a minimally controlled (to insure universal access) system where each of us has the primary responsibility for our own health.

Updated Simpson Bowles Plan versus the February 2013 CBO Report

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Erskine Bowles and Alan Simpson have just released an updated version of their two year old plan to bring our national debt under control.  The new plan is called A Bipartisan Path Forward to Securing America’s Future.   It is very worthwhile to compare their new plan with a recent Report from the Congressional Budget Office.

Bowles and Simpson propose additional deficit reduction of $2.4 trillion over 10 years (which includes the $1.1 trillion in the sequester cuts currently scheduled to take effect on March 1, 2013).  This would have the effect of reducing the national debt from its current level of 76% of GDP in 2013 to 73% in ten years.  The CBO report presents three different scenarios.  Their middle route would require an additional $2 trillion in deficit reduction over and above current law (i.e. assuming  that the $1.1 trillion in sequester spending cuts will take place as scheduled).  This CBO middle route would reduce the Debt/GDP ratio to 67% by 2023.

In other words, for an additional deficit reduction of $700 billion over ten years, we’ll get an additional 6% of Debt/GDP reduction.  These numbers have huge practical significance.  Simpson-Bowles says that we need an additional $1.3 trillion in deficit reduction over and above the sequester cuts, which presumably will soon be enacted,  just to stabilize the national debt over a ten year period at the historically very high level of 73% of GDP.  That’s $130 billion a year for ten years.  Many people are complaining about the approximately 5% cuts in discretionary spending which will be required by the sequester.  But just to stabilize, not really shrink, the Debt/GDP ratio over ten years will require more than twice as much deficit reduction as the sequester.

To even mildly shrink the Debt/GDP ratio to 67% by 2023 will require yet an additional deficit reduction of $70 billion per year.  In other words, we will essentially have to triple the size of the sequester effect in order to achieve real debt reduction over ten years.  And all of this assumes favorable economic conditions such as steady growth and continued low inflation.

Do our national leaders have the will to do what should be easily understood as needed by anyone looking at the numbers with any degree of objectivity?  Let’s hope so because the future of our country depends on it!

The Stark Budget Choices Now Before Congress

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The Congressional Budget Office has just released a new report, “Macroeconomic Effects of Alternative Budgetary Paths” concerning several decisions which Congress will have to make in the very near future, pertaining to the sequester budget cuts of $1.1 trillion over ten years, approving a budget for the remainder of the current 2013 fiscal year and raising the federal debt limit.

The first page of the CBO report conveys the basic message with a single graph.  If the sequester is cancelled and there is perhaps even additional deficit spending in the near term, it will give the economy a small boost in 2014 but cause a drop in GDP of close to 1% by the year 2023.

If the deficit is decreased by an additional $2 trillion over 10 years, beyond the spending cuts required by the sequester, the economy will take a small hit in 2014 but will receive a boost of close to 1% by 2023.  An additional deficit reduction of $2 trillion over 10 years, will cause a greater immediate hit to the economy but produce a much more substantial boost of almost 2% by 2023.

An excellent summary of the CBO report, including political implications, is given by the Wall Street Journal on February 6, 2013.  For example, it is the last scenario above, an additional $4 trillion deficit reduction over ten years, which would put the US on a path to achieve a balance budget by 2023.

Under current law, with no additional deficit reduction in the future beyond the sequester which takes effect on March 1, the annual deficit will shrink for the next three years but then resume a steady climb back to $1 trillion by 2023 and the publicly held national debt will climb from its current level of 73% of GDP to 77% of GDP by 2023.

The choice now before Congress is thus very clear:  should we continue kicking the fiscal can down the road, as the Keynesian economists want to do, or should we bite the bullet, take a small immediate hit to the economy, and thereby put the future of our country on a sound financial basis?

To me the answer is clear as clear can be.  But it will require our national leaders to stand up and be counted.  Do enough of them have the political courage to do what needs to be done?

Why $16 Trillion Only Hints at the True U.S. Debt

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In an Op Ed article last fall in the Wall Street Journal two former Congressmen, Chris Cox and Bill Archer, point out that the total US government debt, now over $16 trillion, is only a fraction of the total unfunded liabilities of the government, which now exceed $87 trillion.  The unfunded liabilities represent future expected payments for Social Security, Medicare benefits for currently employed workers as well as current retirees and also the future retirement benefits of current federal employees and retirees.

If this enormous sum of already obligated future payouts is not bad enough, even scarier is the rate of growth of these unfunded liabilities.  In calendar year 2011, the accrued expense was $7 trillion, double the entire current revenue of the federal government of about $3.5 trillion.  In other words this awful problem is getting much worse every year.

The House Republican majority is trying to address our almost incomprehensibly bad debt problem.  Will they be able to generate enough public support to force the Senate and the President to take the problem seriously?  Right now the odds do not look very good for effective action to be taken.  An enormous crisis is almost on our doorsteps.  How bad will it have to get before public opinion demands action?  It is very hard to remain optimistic about the future of our country when we appear to lack the collective will to take the action which is so obviously needed

The Great Reset

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The Great Recession ended almost four years ago, in June 2009, and growth in the US economy has been an anemic 2% annually since then.  The unemployment rate, now 7.8% is dropping only very slowly and millions of workers are still unemployed or underemployed.  If this isn’t bad enough already, knowledgeable experts are now predicting (see the Friday January 25 Omaha World Herald)  that many mid-skill, mid-pay jobs will never return largely because of the rapidly accelerating use of technology in all aspects of our lives.
Faster economic growth would not only provide more jobs but would also increase tax revenue and therefore shrink the deficit.  If such traditional measures as lower tax rates, deregulation and aggressively promoting foreign trade won’t fly politically which, of course, is very disappointing, then we need to consider other measures which could gain political support.  A good place to start is to enact The Startup Act of 2011 proposed by the Kauffman Foundation.
The Startup Act proposes: 1) more visas for entrepreneurs and Green cards given out with STEM degrees, 2) tax incentives for startup investments, 3) speeding up the patent process for entrepreneurs and 4) relaxing the regulatory burden on startup businesses.  Such measures as these need not be expensive to undertake and could give our economy a big boost.
Our leadership role in world affairs depends on our economic, military and cultural dominance.  First and foremost is our economic strength.  It is vital to speed up the growth of our economy.  Any and all means to accomplish this should be considered.  The status quo is not acceptable!

The Myth of Government Default

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The moment of truth is rapidly approaching and House Republicans need to crank up their resolve to force a real long term solution to the debt crisis of our federal government.  As David Rivkin and Lee Casey describe in the January 11, 2013 issue of the Wall Street Journal, the threat of government default is greatly exaggerated.  $200 billion in tax revenue is coming into the federal government every month, more than enough to keep making interest payments on the national debt as well as paying many other bills.

Far too many national leaders are in a state of denial about the seriousness of our fiscal problems.  House Speaker John Boehner says that “The American people do not support raising the debt ceiling without reducing government spending at the same time.”  The “Boehner Rule” stipulates that an increase in the debt limit must be paired with spending cuts of equal size over a ten year period.  This is an excellent framework for kicking off a national discussion to persuade the American people to support cutting back spending on entitlements and social programs as well as defense spending.

Every economic unit whether it be an individual, a family, a business, a community or a larger political subdivision, has to learn to live within its means.  This elementary rule of common sense applies to our whole country just as much as to any other social group.  Republicans have the clearest grasp of this basic truth at the present time and now need to exhibit the courage of their political convictions.  The future of our country depends on it!

The Magnitude of the Mess We’re In

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In an opinion piece last fall in the Wall Street Journal, George Schultz, and several colleagues from Stanford University’s Hoover Institution, very cogently describe the horrendous economic and fiscal mess in which the United States is now embedded.  Trillion dollar deficits for four years in a row, now going on five, a persistently weak recovery from the great recession of 2008, several rounds of quantitative easing by the Federal Reserve now totaling over three trillion dollars, and worst of all, a complete lack of consensus by political leaders on how to respond to this dangerous situation.

The President and the Democratic majority in the Senate, flush with victory after the November 2012 elections, believe that they have a mandate to continue their present expansionist policies.  The Republican majority in the House of Representatives, only slightly diminished by the 2012 elections, feels equally strongly that it has a mandate to continue applying the brakes.  As a fiscal conservative I agree with the Republicans that we must return to the sound fiscal and monetary policies advocated so eloquently in the above WSJ article.

What strategy can the House Republican’s follow to move federal policy in this direction?  House Speaker John Boehner has suggested that any increase in the debt limit be matched dollar for dollar by cuts in federal spending over a ten year period.  For example, the “Boehner Rule” would require that an increase in the debt limit of $1 trillion, enough to last about one year, would be offset by spending cuts of $100 billion a year for 10 years.  If such a regimen were then repeated a year from now, another $100 billion in spending cuts per year would be needed as well, and so on.

Taking into account the baseline budgeting process in Congress, whereby budgets are automatically increased from one year to the next by the anticipated rate of inflation, and also the occasional need for emergency appropriations to cover natural disasters and other dire events, the Boehner Rule would have the likely effect of holding spending approximately constant from one year to the next in absolute terms.  While this is not the same as what most people would understand by actual spending cuts, nevertheless it does represent significant restraint in federal spending, compared to recent patterns.

As the economy continues on its current growth trajectory of about 2% per year, this would mean that new tax revenues would eventually catch up with relatively flat spending levels and eventually lead to a balanced budget.