The Republican tax bill has now come out of conference and will soon be voted on by both the House and the Senate. It is expected to easily pass both chambers and be signed by the President. As I have discussed extensively on this blog, I have no argument with the individual features of this bill. They will definitely increase economic growth which is highly desirable.
The problem is that the tax bill will also add $1 trillion to the debt over ten years (as scored by the JCT). It is simply outrageous for the GOP to consciously add $1 trillion to our already $15 trillion debt (the public part on which we pay interest), which at 77% and climbing, is the highest it has been since right after WWII.
But the damage will be even worse than this. The trillion dollar artificial stimulus is likely to overheat an already briskly growing economy. As the Economist reports in its latest issue:
Second quarter growth of 3.1% and third quarter growth of 3.3% are very strong.
Median household income grew 5.2% in 2015 and 3.2% in 2016.
The average net worth of households in the middle income quintile grew by 34% between 2013 and 2015.
The wages and salaries of production workers grew at a 3.8% pace in the third quarter of 2017.
The unemployment rate at the end of 2018 is likely to be between 3.4% and 3.8%.
Economic growth is good because it raises living standards across the board. But faster growth also means higher inflation which means higher interest rates as the Federal Reserve responds. Higher interest rates mean higher interest payments on our massive debt. Every time the Federal Reserve raises interest rates by ¼ %, the interest payments on our debt will increase by about $38 billion per year. A 2% increase in interest rates, likely within two years, means a $300 billion increase in annual interest (on top of the $266 billion paid in FY 2017). Our massive debt will soon become a huge burden for the federal budget.
Conclusion. Adding $1 trillion to the debt on top of the existing debt is a terrible idea. Such artificial stimulus at a time when GDP growth is already picking up will drive up interest rates all the faster and greatly speed up the day of reckoning for extreme fiscal irresponsibility.
Most of the time on this blog I write about the pros and cons of various policy measures, independently of which individuals or parties are supporting them. But, of course, the U.S. President is the most important single actor on the political stage so it does matter immensely what the President thinks on any particular issue.
The three biggest quagmires for Republican presidents are nativism, protectionism and isolationism. Where does President Trump come down on these major policy threads?
Isolationism. Mr. Trump is not an isolationist. He is working with China and other Asian countries to contain North Korea. He is working with several Mideast powers to defeat ISIS. We have beefed up forces in Afghanistan to neutralize the Taliban. He has clearly backed down on his threat to withdraw from NATO.
Protectionism. Unfortunately, Mr. Trump is too much of a protectionist. He is not against trade per se but he wants to replace broad multilateral trade agreements with separate bilateral trade agreements with lots of different countries. This will simply create an “insanely complicated mishmash of rules.” Instead he should focus on bargaining with China to get much better access for American products into Chinese markets.
Nativism. Again, Mr. Trump (and many of his supporters) apparently doesn’t appreciate the enormous contributions which immigrants make to the U.S. economy at both the high end (skilled workers and entrepreneurs) and the low end (willingness to provide hard physical labor in agriculture, meatpacking, construction and personal care). Especially with our currently low unemployment rate of 4.1% we should take the opportunity to solve our illegal immigration problem by expanding our guest worker visa program.
Conclusion. President Trump is clearly not an isolationist but smarter trade and immigration policies would help to speed up economic growth and create more jobs and higher wages for the blue-collar workers who are Mr. Trump’s main base of support.
My recent posts about the American Idea have argued that our country has a great future before it. We have a strong and prosperous economy and are the world’s leading innovator. Furthermore there are clear cut and effective ways to address the income inequality and poverty which hold back many Americans from fully sharing the benefits of our remarkably successful society.
But there is one huge problem our political system is ignoring which will lead to a major crisis if left unattended much longer.
I am referring, of course, to our gargantuan:
National Debt, now sitting at 77% of GDP (for the public part on which we pay interest), the largest it has been since the end of WWII. It is predicted by the Congressional Budget Office to keep steadily getting worse without major changes in current policy. Right now all of this debt is essentially “free money” because interest rates are so low.
Economic growthis created by tax cuts but only 10-20% of the lost revenue from tax cuts is offset by new growth.
Democrats, on the other hand, don’t take the debt seriously, except when arguing against Republican tax cuts. Debt deniers claim that the risk of government overspending is inflation, not bankruptcy. What they don’t understand is that
Interest rates will return to more normal (and much higher) historical levels eventually and, when this happens, interest payments on the debt will skyrocket by hundreds of billions of dollars every year. This will crowd out all sorts of spending on popular domestic programs. It is likely to lead to a new fiscal crisis, much worse than the Financial Crisis of 2008.
Conclusion. For all of our nation’s great strengths, we are in a very serious fiscal pickle, with no clear cut path of orderly resolution. Realistically our debt problem cannot be wound down without committed Presidential leadership and this is unlikely to happen anytime soon.
The Atlantic monthly magazine is celebrating its 160th anniversary this year. In 1857 its founders envisioned that the magazine would “honestly endeavor to be the exponent of what its conductors believe to be the American idea.” In the current issue one of its writers asks, “Is the American Idea Doomed?” and claims that it has few supporters on either the left or the right. Well, I happen to be in the middle and I think the American idea is doing very well indeed.
The World Economic Forum ranks the U.S. as the world’s most competitive large economy and, in fact, the U.S. is getting richer faster than anybody else.
Productivity growth in the digital industries has grown at the annual rate of 2.7% over the past 15 years compared with only an anemic .7% annual growth in productivity in the physical industries. The U.S. economy is becoming more digital all the time.
The four U.S. companies, Amazon, Apple, Facebook and Google are in the process of revolutionizing all aspects of life not only in America but all around the world.
According to the Kauffman Foundation entrepreneurship is flourishing in the U.S. (see chart), and not just in Silicon Valley.
According to Freedom House democracy has made much progress around the world in the last 30 years, even if further growth has stalled for the past ten years. Other democratic countries are our best friends and so we want more of them.
Granted Donald Trump is a wild card. So far his record is mixed but he hasn’t made any big mistakes (liking dragging us into war or hurting the economy). It is unlikely that he’ll slow our huge forward momentum whether or not he helps it.
Conclusion. “The democratic experiment is fragile” (perhaps!) but it’s also got a lot going for it right now. We can never afford to be complacent but we need not be pessimistic either.
My last post noted that with our unemployment rate down to 4.2% and with median household income having increased by 3.2% in 2016, the emphasis now should be totally directed to addressing our number one long term problem:
Massive national debt. With a deficit of $668 billion for Fiscal Year 2017, our debt now stands at 77% of GDP (for the public part on which we pay interest), the highest it has been since the end of WWII. It is predicted by the Congressional Budget Office to go much higher without significant changes in current policy.
Obviously our annual deficits are way too large and we need to shrink them dramatically. One way to start doing this is to speed up economic growth which will increase tax revenue especially by creating more jobs and better paying jobs. Faster economic growth is quite feasible and this is one of the main goals of tax reform, now being considered by Congress. But it needs to increase growth without increasing the deficit which is entirely doable.
But there is another big reason for revenue neutral tax reform as well. The dollar has depreciated by 10% in 2017 while the stock market has increased by 13%. The S&P price-earnings ratio has risen to 30 at present which is way above average. All of this means that we are in a loose money financial bubble. For Congress to make our annual deficits worse than they already are, with deficit increasing tax reform, would make this bubble even bigger and therefore be highly irresponsible.
Conclusion. When interest rates return to much higher normal levels, as they inevitably will, interest payments on our debt will grow dramatically and cause a huge budget crunch. If ignored, this situation will eventually lead to a new fiscal crisis, much worse than the Financial Crisis of 2008.
In my last post I summarized the scientific evidence which convinces me that global warming is occurring and is primarily caused by the emission of carbon dioxide from the use of fossil fuels for energy production.
Several Face Book comments on my post suggest that there could be other causes such as a decrease in cloud cover over the earth, sunspot activity and even the carbon dioxide which is exhaled by the 7 billion (and growing number of) humans now alive on earth. I am personally unable to evaluate the validity of these possible causes. I rely on the overwhelming consensus of climate experts that the problem is caused by the burning of fossil fuels.
Perhaps the scariest evidence is the warming of the oceans and the related rising of sea levels by 1/8 of an inch per year (which is equivalent to a one foot rise per century). When I referred to the three recent catastrophic hurricanes of Katrina (2005), Sandy (2012) and now Harvey, several readers responded that there is no proof that the severity of these storms was caused by global warming.
I agree! It is just that warmer oceans mean more evaporation and therefore more rainfall around the world. This means that severe storms will become more likely as the oceans become warmer.
Take a look at the two charts from the current issue of The Economist. They show that various types of natural disasters have been increasing in recent years and that record-breaking precipitation events are on the increase. Conclusion. Global warming is already happening. But we can act to keep it from getting worse. More renewable energy (wind and solar) is only part of the answer. The best way to cut back on carbon emissions is with a (revenue neutral) carbon tax. This would be much more efficient than ad hoc regulations like the Clean Power Plan and ever higher auto gas mileage standards.
I am a non-ideological (registered independent) fiscal conservative and social moderate. I was not very excited about either presidential candidate last fall but finally decided to vote for Clinton because of Trump’s sleaziness.
As it turned out Mr.Trump was elected because of his strong support from the white working class, especially in the upper Midwestern states of Wisconsin, Michigan and Pennsylvania. Interestingly, the Democrats are responding by proposing legislation to try to appeal more strongly to blue-collar workers.
Of course I disapprove of Donald Trump’s poor handling of the Charlottesville tragedy but I try to avoid being distracted by all of the drama and rather stay focused on his policies and actions. In this respect there are both plusses and minuses.
On the positive side:
North Korea. He is handling this crisis well simply by working through the UN to condemn North Korea’s provocative testing of ballistic missiles. Also his Administration has clearly stated that the goal of U.S. policy is to denuclearize the Korean peninsula, not to achieve regime change in North Korea.
The economy is still chugging along at 2% annual growth. On the deregulation front, the annualized pace of new regulations for 2017 is 61,000 pages, down from 97,000 in 2016. This is the lowest level since the 1970s and has the potential to speed up growth.
On the negative side:
NAFTA renegotiation is just getting started. Any shrinkage of U.S. exports will badly hurt the economy, especially in states like Nebraska which depend so much on agricultural exports.
Immigration. Mr. Trump proposes to dramatically decrease annual legal immigration quotas, especially for low-skilled workers. This is a very poor idea which will hurt the economy, especially in states like Nebraska which have low unemployment rates.
Conclusion. President Trump’s record at this point is mixed, all the more so since the two very important issues of the 2018 budget and tax reform have yet to be resolved in Congress. Mr. Trump’s election may or may not be good for progress in America. We simply don’t know yet.
As I frequently remind my readers I am a fiscal conservative and a social moderate. I usually write about particular economic and fiscal problems facing our country. But every now and then I like to step back and view our overall situation at one time. The last time I did this was here.
Let’s take another look:
The economy is puttering along at 2% annual growth with a relatively low unemployment rate of 4.3% and a good indication that faster growth, up to 2.5% annually, is right around the corner, see here and here. The economy, at least, is headed in the right direction.
Foreign policy. Long term our biggest problem is China, which has four times as many people as we do and is growing economically three times as fast. China will soon surpass us in both economic and military strength. Our best insurance for this inevitable day is to have lots of democratic friends around the world.
Global warming is real and getting worse. Our best strategy for dealing with it is a revenue neutral carbon tax, rather than depending on ad hoc regulations like the Clean Power Plan and ever increasing auto emission standards. If the U.S. demonstrates its seriousness with a carbon tax, it is likely that the U.S. and China (which is highly polluted) could work together to establish world-wide carbon emission standards.
National debt, currently 77% of GDP (for the public debt on which we pay interest), is predicted by the CBO to keep getting steadily worse (see chart) without major changes in current policy. Right now our approximately $14.3 trillion public debt is almost “free” money because interest rates are so low. But sooner or later interest rates will return to more normal levels and, when this happens, interest payments on the debt will rise by hundreds of billions of dollars per year. This will inevitably lead to a severe fiscal crisis, far worse than the Financial Crisis of 2008.
Conclusion. I am relatively optimistic that we can maintain good relations with China and will have the good sense to better control carbon emissions. But our debt problem is politically very difficult to address because it will require spending curtailments. How do we successfully address such a huge problem?
Spring in the U.S. is coming sooner each year on average.
The three biggest carbon emitters in the world are China, the U.S. and India in that order. But what is also true, and not sufficiently well appreciated, is that carbon emissions in the U.S. are dropping while they are still increasing in China and India:
In the 2015 Paris climate agreement, China pledged that it would start reducing carbon emissions by 2030 but, in the meantime, is still continuing to open coal burning power plants.
In the U.S. carbon emissions have been steadily decreasing since 2000 (see chart).
In India the economy is growing at 7% per year and 240 million people still lack electric power. This means that carbon emissions from coal burning are likely to double in the years ahead.
Coal use in the U.S. will continue to drop with or without enforcement of the Obama era Clean Power Plan because natural gas is now so plentiful and so much less expensive than coal. The best way for the U.S. to continue showing leadership in combatting global warming is for it to adopt a revenue-neutral carbon tax. This would let the market sort out which type of energy is the cleanest and most efficient in meeting our country’s growing energy needs. In fact a carbon tax might even be beneficial for the coal industry by creating a strong incentive to develop carbon capture and storage technology. Conclusion. Most Americans now agree that global warming is real and that this presents a huge threat to human civilization. It is likely that a revenue-neutral carbon tax will be adopted by our country in the near future.
Everybody should read Tyler Cowen’s compelling new book, “The Complacent Class.” As I have discussed in two recent posts, here and here, Mr. Cowen lays out the thesis that America has lost much of its dynamism in recent years because life has become so comfortable for so many people, especially the professional elites.
But now things are looking even better yet:
A global economic upturn is under way, especially in manufacturing.
The Federal Reserve is continuing to raise interest rates, confident that fundamental data on employment and inflation (see chart) is looking more and more positive.
Progress is being made on fixing the American healthcare system even if it’s not as good as it could be.
The Republican Congress and Trump Administration are united in their desire for corporate and business tax reform which will give the American economy a big boost when it gets done.
These trends auger well for the American economy in the immediate future. However there is one very dark cloud on the horizon:
Our national debt (the public part on which we pay interest) is now 77% of GDP, the highest since the end of WWII and is predicted by the Congressional Budget Office to keep steadily getting worse without fundamental changes in public policy. In fact, the debt limit, which had been suspended in November 2015, was reinstated by law on March 16. It will have to be raised in the next few months in order to avoid default by the federal government.
I fervently hope that the fiscal conservatives in Congress (such as the Republican Study Group and the Freedom Caucus) will insist on real fiscal restraint going forward as their price for voting to raise the debt limit.
Conclusion. We affluent Americans are so wrapped up in enjoying our good fortune that we lose track of a huge problem on the not so distant horizon. Our prosperity is being heavily financed with borrowed money and we will soon have to pay the piper, unless we are willing to bite the bullet. Do we have the political will to do this?