How Donald Trump Could Redeem Himself

 

From a reader of my blog:
I think he is too flawed, self-centered and sociopathic to accomplish much. I believe that tax reform will become tax cuts for the wealthy (no inheritance tax, etc.) and dealing with budget deficits will not happen. I know you think Trump will be contained by the conservative members of Congress. The Republicans seem unwilling to confront him or speak out as long as his base continues to be very loyal. I think he is so wounded now that it will be hard to accomplish much.


Granted that Donald Trump is hopelessly ensnared in controversy and incapable of changing his ways, he still has many opportunities to do something positive. For example regarding our extremely serious debt problem, he could focus on:

  • Coming up with a budget that reduces the debt path. No one expects the budget to be balanced in one year. Last year’s Republican plan would have taken ten years to get the job done. The important thing is to clearly move in this direction.
  • Focusing healthcare reform on cost control. Give the Democrats credit for expanding healthcare access with the Affordable Care Act. But now focus on reining in the cost of healthcare in America.

  • Enacting fiscally responsible tax reform. Most people agree that the tax code is a complicated mess and, especially, that the corporate tax rate is too high. There are many ways to achieve lower tax rates and simplification in a revenue neutral way.
  • Stop digging the debt hole deeper by just adding new initiatives. There will always be attractive new programs which are worth pursuing. But in adding them to the federal budget, other programs which are no longer effective need to be phased out.
  • Reforming entitlements such as Social Security, Medicare and Medicaid. These are the big drivers of national debt. Without entitlement reform, all other efforts to restrain federal spending will be insufficient.

Conclusion. There is nothing easy about pursuing the above agenda. Implementing it will be highly controversial with lots of vociferous opposition.  It will take strong leadership to push it through.  But it represents a huge opportunity for a controversial president to do something worthwhile.

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Quo Vadis America?

 

In many respects things are going quite well in the U.S. at the present time:

  • The economy is chugging along at 2% annual growth, not spectacular but better than in most other developed countries. In fact a rather severe labor shortage is developing in some industries such as construction and agriculture.   More specialized guest worker visas would help relieve these shortages. Better career and vocational education in high school as well as targeted job retraining programs for the underemployed would help prepare workers for the millions of high-skill manufacturing jobs going unfilled.
  • Pesky foreign policy problems are under control. ISIS is being squeezed in the Middle East. China appears willing to help contain the North Korean nuclear threat. Iran is mostly abiding by the 2015 nuclear agreement.
  • Congress is inching its way towards resolution of the healthcare stalemate, by repairing Obamacare rather than repealing it. It’s not clear how much tax reform will be implemented this session but there is at least a consensus on lowering the corporate tax rate to encourage multinational companies to bring their profits back home.
  • Deregulation efforts by the Trump Administration will give the economy at least a small beneficial boost.

    But there is one huge problem which is constantly being swept under the rug or being kicked down the road by both parties in Congress and by Democratic as well as Republican presidential administrations alike. I am referring, of course, to our massive national debt, now sitting at 77% of GDP (and growing) for the public part on which we pay interest.  Right now this debt is essentially “free” money because interest rates are so low.  But it’s really a ticking time bomb because sooner or later interest rates will return to more normal levels and then interest payments will skyrocket causing a huge fiscal crisis.

Conclusion. It is imperative for Congress to reform entitlement programs to make them less costly to the federal budget and to otherwise restrain discretionary federal spending across the board. The future of our country depends on our national leaders exercising much greater fiscal restraint.  They need to get much better at doing this!

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The Importance of Shrinking Our Debt and How to Do It

 

President-elect Donald Trump is on record as favoring tax and regulatory reform in order to speed up economic growth and I have made it clear that this can be accomplished without increasing our debt.
But what is really needed is to grow our economy faster and actually shrink our debt at the same time.  It will be very difficult, essentially impossible, to accomplish this with growth alone or even by raising taxes because the magnitude of our debt, 76% of GDP and rising, is so great.

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There is really only one way to begin to shrink the debt and this is to get entitlement spending under control.  The above chart shows that, without major changes, by 2032 all tax revenue will go towards healthcare, Social Security and net interest. Here is what needs to be done:

  • Social Security is already paying out $100 billion per year more than it collects in payroll taxes. Its Trust Fund will run dry in 15 years unless major changes are made and all benefits will drop by about 25% when this happens. We need to either increase the eligibility age for full benefits and/or raise the income cap on payroll taxes. These changes can be phased in but the sooner we get started the less painful it will be.
  • Medicare is an even bigger problem than Social Security. Either we have government rationing, i.e. “death panels,” or else rationing by price meaning some form of premium support. This simply means that we will all have more “skin in the game,” in the sense that we will all have a financial incentive to minimize our own healthcare expenses.
  • Medicaid should be block granted to the states so that the federal government is not obligated to a fixed match for all state Medicaid expenses. Again, cost control is the object of such a change.

Conclusion. It needs to be emphasized as strongly as possible that the reason for stringent cost control of entitlement programs is to preserve them for posterity, not destroy them.  Our prosperous way of life is severely threatened by our unwillingness to recognize this problem.

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Fiscal Policy after the Election

 

As the presidential election tightens and the likely margin of victory for either candidate continues to shrink, it becomes ever more apparent that we need a bipartisan approach to solving our most basic problems.  My last post discusses the need for fundamental tax reform to get our economy growing faster to create more and better paying jobs.  Today I remind my readers of the need for better fiscal policies as well to address our massive and steadily deteriorating debt problem.
As the American Enterprise Institute,  among many other think tanks, makes abundantly clear, we are spending more and more of our federal budget on entitlements  as opposed to all of the many other federal responsibilities which are lumped together as discretionary spending.  In other words, the only way to fix our deficit and debt problems is to achieve better control over entitlement spending.

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AEI has some excellent ideas on how to do this:

  • Social Security should move towards providing a universal flat benefit, set at the federal poverty level, for all U.S. residents aged 65 and older. Social Security would then become a guarantee against poverty in old age rather than a scheme for partially replacing pre-retirement earnings for middle and higher earning households.
  • Health Care. The Affordable Care Act should be replaced with a less regulated system (i.e. no mandates). The federal tax preference on employer plans could be limited to the cost of catastrophic (high deductible) insurance plus a contribution to health savings accounts. Households without employer coverage would receive a comparable tax credit.
  • Medicare would be converted into a premium support system with a fixed level of support comparable to that provided by employers.
  • Medicaid would be converted into a block grant program for the states based on the fixed, per capita costs for enrolled populations.
  • Other Safety-Net Programs should emphasize work as the key to improved economic prospects plus greater state control over resources in order to encourage innovation.

Conclusion. It should be emphasized as strongly as possible that the purpose of entitlement reform is to preserve and strengthen entitlements, not to weaken or destroy them.  Without such action we are headed for a much worse financial crisis than the one we had in 2008-2009 which will put all government social programs at risk.

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How to Get Our Economy Back On Track

 

My last several posts have expressed dissatisfaction with both presidential candidates and the hope that whoever wins in November (very likely Hillary Clinton) will work with the Republican House of Representatives to implement its “A Better Way” plan for national renewal.
In particular, faster economic growth would produce more jobs and better paying jobs and hence is highly desirable.  As many people, including myself,  have pointed out, it is low productivity growth caused by low business investment, which is largely responsible for slow economic growth.
The economist John Taylor has an excellent analysis of this problem.  He points out that the rate of economic growth equals the growth of labor productivity plus the growth of employment.

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He then shows that:

  • Productivity growth slowed from the mid-1960s until the early 1980s, then increased until the mid-2000s, and has slowed way down in the past ten years.
  • The labor force participation rate has dropped dramatically since the Great Recession but only a small part of this drop off was caused by demographic trends (i.e. more retirees).

    capture72Such relatively long cycles of productivity growth and decline (longer than normal business cycles) suggests that government policy is having a major effect on economic performance. According to Mr. Taylor, what is needed is:

  • Tax reform to lower tax rates to improve incentives for work and investment.
  • Regulatory reform to prevent regulations which fail cost-benefit tests.
  • Free trade agreements to open markets.
  • Entitlement reforms to prevent a debt explosion.
  • Monetary reform to restore predictability in financial markets.

Conclusion. Mr. Taylor makes a very strong case that faster economic growth is not only possible but even achievable in the short run if our national leaders would just make some common sense policy changes.

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Our Dire Fiscal Situation: A Summary

 

We are currently living in a high risk fiscal bubble. Low interest rates mean that our enormous and rapidly growing national debt is virtually “free” money.  When interest rates return to historically normal (much higher) levels, interest payments on the debt will explode putting us in a precarious fiscal situation.
As I have pointed out in the last few posts, it is the cost of entitlements and, in particular, health care entitlements, i.e. Medicare and Medicaid, which is driving our debt problem. The most effective way to control these entitlement costs is to control overall health care costs by insisting that all of us have more “skin in the game,” meaning that we must pay more of our health care costs directly from our own pockets as opposed to having them paid by third party insurance companies.
Capture20The latest report from the Congressional Budget Office, just a few days ago, shows that our debt problem is even worse than was projected just a year ago (see above).
Capture21The second chart (just above) shows the magnitude of the effort it will take to get our debt under control.  Just to stabilize the debt, i.e. to keep it from getting any worse than it is right now, will require a combination of spending cuts and/or revenue increases of 1.7% of GDP which amounts to $330 billion in 2016 dollars.
Conclusion. We have a huge national debt problem which is only going to keep getting worse until we make somewhat painful changes in federal policy.  We have to either restrain spending increases and/or increase taxes by significant amounts.  Health care entitlements are the biggest problem area and Medicare is worst of all.
Our two presumptive presidential candidates, Hillary Clinton and Donald Trump, are completely ignoring this grave problem.  And indeed their proposed policy initiatives will only make it worse!
Do we have the strength to deal with this dire problem short of another crisis?

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Reforming U.S. Health Care to Control Costs

 

My last two posts, here and here, have made the case that:

  • Our national debt is now 74% of GDP (for the public part on which we pay interest), the highest since WWII, and steadily getting worse. This will create a huge problem in the not so distant future, as soon as interest rates return to normal (higher) levels.
  • Entitlement spending is the main driver of our increasing debt. The best way to control Medicare and Medicaid spending is to control the cost of health care spending in general.
  • The overall cost of health care, public and private, in the U.S. is now 17.4% of GDP, much higher than for any other developed country, and is steadily increasing.
  • The main reason our health care costs are rising so rapidly is that Americans do not have enough “skin in the game.” Health insurance pays for close to 90% of our health care costs so that we pay for very little directly out of our own pockets. This means we have little incentive to pay close attention to these costs.

Christus Health in Dallas and Privia Medical Group in Washington, DC  are causing disruption by shifting health care delivery from hospitals to outpatient settings.  They are putting in place a number of lower-cost and more consumer friendly options which reward collaboration, performance and a focus on cost and quality on the part of both management and front-line providers.
Capture18As I have pointed out in previous posts, here and here, several policy changes would help speed up this process of needed change:

  • The tax exemption for employer provided health insurance should be limited to the cost of high deductible catastrophic insurance with an equal (refundable) tax credit for those without employer coverage. Health Savings Accounts would be encouraged for routine health care expenses.
  • Affordable Care Act exchanges would continue to operate as at present but without any mandates.
  • Medicare would provide a fixed level of assistance with which seniors would purchase a private health plan of their own choosing, rather than being open ended as at present.
    Medicaid. The federal government would give states fixed, per-person payments. Low-income individuals could combine Medicaid and the (refundable) tax credit to enroll in private insurance.

Conclusion. The whole idea is to make everyone, rich and poor, young and old alike, responsible for their own health care expenses.  Only with such a consumer-oriented, free-market system will we be able to preserve the high quality of American health care and rein in excessive costs at the same time.

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