Senator Fischer, if You Vote for the Awful Tax Bill, There Will Be Political Consequences!

 

Congressional Republicans have agreed on a compromise tax bill, details to be released soon. After scoring by the Joint Committee on Taxation, it will be voted on separately by the House and Senate, sometime next week.  It is likely to reach the President, and be signed into law, before Christmas.


As I have previously discussed at great length, this is a very bad bill for the following reasons:

  • Lowering the corporate tax rate to 21% is actually a good idea because it will encourage U.S. multinational companies to bring their foreign profits back home for reinvestment as well as encouraging foreign companies to set up shop in the U.S.
  • Adding $1 trillion to the debt over ten years, as previously scored by JCT and likely on rescoring, is what is so awful about the tax plan. It is also sad because this could be avoided.  Our debt (the public part on which we pay interest) is already, at 77% of GDP, the highest it has been since right after WWII, and is predicted by the Congressional Budget Office to keep getting worse without major changes in current policy.
  • As interest rates rise, interest payments on the debt will grow dramatically (right now our debt is almost “free” money). Eventually this will lead to a new financial crisis, much worse than in 2008.
  • Overheating the economy, now growing at 3% per year for the last two quarters, makes the tax bill even worse. The last thing our economy needs right now is a trillion dollars of artificial stimulation. This will force the Federal Reserve to raise interest rates faster than it would otherwise.
  • Nebraska Senator Deb Fischer, who is up for reelection in 2018, voted for the Senate version of the tax plan. She should reconsider for the final combined bill and vote no.

Conclusion. If Senator Fischer votes for the final version of this bill, and if it passes and is signed into law by the President, then she is personally responsible for the devastation it will wreak on our economy. What can I as an individual Nebraskan do about this?  It should not be hard to figure out.  Stay tuned!

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Ignoring Massive Public Debt Is Morally Unacceptable

 

The House and Senate have now each passed their own versions of tax reform and a conference will come up with a single version acceptable to both legislative chambers. Each of the individual bills has been scored to add $1 trillion to the national debt over a ten year period and so the final bill will probably have the same feature.  This is a badge of dishonor on the controlling Republican Congress for the following reasons:

  • Yes, economic growth at 2.1% of GDP since the end of the Great Recession is too slow and has caused stagnant wages for millions of middle- and lower-income workers. Even though the unemployment rate has now dropped to 4.1% and the economy has grown at a rate of 3% for the past two quarters, there is still much labor slack to make up for.
  • Yes, the corporate tax rate is too high and encourages multinational companies to invest overseas. Immediate expensing for new business investment would also speed up growth and thereby create new jobs and higher wages.
  • Revenue neutral tax reform is “easily” accomplished by “simply” offsetting all tax rate cuts by closing loopholes and shrinking deductions by an equal amount. Since two thirds of taxpayers do not itemize deductions, it is primarily the higher income taxpayers who benefit from tax deductions and they can afford to pay higher taxes.

  • Current national debt, at 77% of GDP (for the public debt on which we pay interest), is the highest it has been since right after WWII, and is already predicted by the CBO to steadily keep getting worse. When interest rates eventually return to more normal and higher levels, interest payments on the debt will soar. And this will continue indefinitely, eventually leading to a new fiscal crisis, much worse than the Financial Crisis of 2008.

The GOP tax plan should be killed. Although a revenue-neutral tax plan could be put together and would be beneficial, the current plan makes our debt much worse and should be killed. We simply must make shrinking the debt a very high priority and not be distracted from getting this done.

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The Folly of Building a Streetcar System in Omaha

 

The City of Omaha is now considering building a Streetcar System for an estimated cost of $156 million. Both of the two mayoral candidates have endorsed this proposal.

Here are the basic facts about the project:

  • It would run from TD Ameritrade Park in downtown Omaha to 42nd and Farnam Streets in midtown Omaha, a distance of about four miles. It would cost about $7.5 million per year to operate the line and would generate about $700,000 a year in annual revenue with a fare of $1.25 per ride. Adding a fee of $1.50 per ticket per College World Series event (at TD Ameritrade Park) would generate about $500,000 per year in additional income.

  • The financial assessment of the project by HDR suggests that the Federal Transit Administration could be asked for a grant of $78 million, or one-half of the total cost. The FTA is already contributing $15 million towards a $30 million Bus Rapid Transit system along Dodge Street approved by the City Council. The BRT involves 27 sleek, modern bus stop shelters along the route at a cost of $260,000 each.
  • The FTA has an annual budget of $19 billion. The Trump Administration is asking for a $2.4 billion cut in the FTA budget for 2018.  Congress has not yet taken any action on the Trump Budget proposal. But the FTA budget is clearly funding extravagant local projects around the country and is ripe for a major budget cut.

Conclusion. Omaha is simply not large enough, nor with a sufficiently dense population base, to support a downtown street car system aimed at the tourist trade. It could only be financed with massive federal support at a time when the federal government is rightly trying to cut back on unnecessary and wasteful spending. Don’t do it, Omaha!

Why We Should Be Deeply Worried about Our National Debt

 

My last post is highly critical of the economist and New York Times columnist, Paul Krugman, for encouraging massive new deficit spending to stimulate our under-performing economy.
Debt and the slow growth of our economy are the two main topics of this blog which I have now been writing for almost four years.  How to speed up growth is a complicated and highly charged political issue about which reasonable and well informed people can differ.  However avoiding excessive debt is to me a moral issue whose resolution should not be that difficult, at least in a conceptual sense.
Capture2 I have often used the above chart from the Congressional Budget Office to illustrate our debt problem because it clarifies the problem so vividly.  Here are its main features:

  • Our public debt (on which we pay interest), now about $13 trillion, is 75% of GDP, the highest since right after the end of WWII. And it is projected to keep getting steadily worse under current policy.
  • Note the decline in the debt from the end of WWII until about 1980. This doesn’t mean that the debt was actually paid off but rather that it shrank as a percentage of GDP as the economy grew fairly rapidly during this time period.
  • From 1980 – 2008 the debt level fluctuated and increased somewhat but did not get badly out of control.
  • Debt shot up rapidly with the Great Recession and has been continuing to grow ever since.
  • The current GDP of our economy is about $19 trillion. At a current growth rate of 2.1%, this adds $400 billion of GDP per year. This means that a $400 billion deficit for 2016 would stabilize the public debt at 75% of GDP. But our 2016-2017 deficit is projected to be almost $600 billion (and rising). This is not good enough!

Conclusion. In order to begin to shrink the size of the public debt, it is imperative that annual spending deficits be reduced to well below $400 billion per year. This will be difficult for our political process to achieve but it is the only way to avoid a new and much worse financial crisis in the relatively near future.

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Why the Federal Government Fails So Often

 

This blog is about the major fiscal and economic problems of our country and specifically our stagnant economy (2% real growth for the past six years) and massive federal debt (the public debt, on which we pay interest, is 74% of GDP, the highest since WWII). My major sources of information are the New York Times and Wall Street Journal but I also make use of reports from various think tanks. Today’s source is the recent report, “Why the Federal Government Fails,” by the Cato Institute’s Chris Edwards.
CaptureAccording to Mr. Edwards, there are five main reasons for this:

  • Top-Down Coercion. Federal agencies impose more than 3,000 regulations each year. Total regulations now span 168,000 pages. Benefits are distributed through more than 2,300 programs. Federal policies are often based on guesswork. Failed policies are seldom weeded out because they are funded by taxes and are not contingent on performance.
  • Lack of Knowledge. Private markets operate efficiently on the basis of price information. Government subsidies and regulations throw a monkey wrench into the price mechanism.
  • Political Incentives. Congress focuses on the benefits of programs but does not consider the full costs because benefits are delivered to narrow groups while the costs are spread widely. There are too many fiscal illusions to hide costs such as: paying with debt rather than higher taxes, taxing businesses which then just raise prices, conferring benefits by regulation (e.g. requiring employers to provide healthcare) rather than direct subsidy.
  • Bureaucratic Incentives. There are too many rewards for inertia and not enough for the creation of value such as the absence of profits and losses, rigid compensation, lack of firing, red tape, agency capture, etc.
  • Hugh Size and Scope. The $4 trillion annual budget is 100 times the average state budget of $40 billion. It is simply too vast for members of Congress, and other top officials, to understand what is going on. The more programs the government has, the more likely they will work at cross-purposes.

Mr. Edwards concludes that “the most important way to improve federal performance would be to greatly cut the government’s size” and to do this by shifting federal activities back to the states. With this recommendation I heartily agree!

Cutting the Federal Budget, an Example: The Highway Trust Fund

 

As an advocate of cutting federal spending, people sometimes ask me exactly what I would cut to save money and lower the deficit. I have two standard answers to this question:

  • Often I will respond, it is up to Congress to figure this out. The important thing is to shrink the deficit one way or another. It doesn’t matter from a fiscal point of view exactly what is cut.
  • Another answer I like to give is that with the sequester already slowing down discretionary spending, we should concentrate on finding savings in entitlement programs like Social Security, Medicare and Medicaid.

While both of these answers have validity in a general sense, nevertheless I do look for ways to cut back on discretionary spending as well. Here is a good idea from Reason magazine’s Veronique de Rugy, “Let States Build Their Own Highways.” The rationale is very simple. The federal gasoline tax of 18.4 cents/gallon brings in about $40 billion per year which goes into the Highway Trust Fund. But the HTF is spending $53 billion per year, meaning that federal gas tax revenue is being supplemented by $13 billion from general revenues. This additional $13 billion per year can be viewed as an unjustified federal expense merely adding to the deficit.
Capture2The way to address this issue is to:

  • Abolish the federal gasoline tax of 18.4 cents/gallon as of some specific date in the future, say in a year from the time such a law is enacted.
  • Turn over all responsibility for highway construction to the states.
  • States can then decide individually how much of the federal gasoline tax they wish to continue as a state gasoline tax in order to finance their own highway funding.
  • Minimal federal guidelines could be maintained if desired to insure uniform quality control by the states.

Of course, a $13 billion annual budget savings could be looked at as a drop in the bucket, not nearly large enough to make a sizable dent in the federal deficit (latest projection for fiscal year 2015: $426 billion). That would be too cynical. There are undoubtedly many other smart ways to cut back federal spending. I am constantly looking for them!

Minorities and Higher Education: a Severe Dilemma

  

 

In two recent posts, here and here, I have established that:

  • Rapid increases in federal student aid in recent years have led to tuition increases at both public and private educational institutions and for both undergraduate and graduate students.
  • American higher education is increasing the divide between the haves and the have-nots in the sense that college degree attainment is increasing much faster for those students from higher income families.
  • Furthermore, students at private, nonprofit (most prestigious) institutions have higher graduation rates and lower debt levels compared to students from public institutions who, in turn, have both higher graduation rates and lower debt levels than students at for-profit colleges (least prestigious).Capture

As if this isn’t bad enough, it gets even worse! The Federal Reserve Bank of St. Louis has just reported, “Why Didn’t Higher Education Protect Hispanic and Black Wealth?” that “White and Asian college grads do much better than their counterparts without college, while college-grad Hispanics and blacks do much worse proportionately.” (see above chart).
In short, the federal government is spending more and more money on higher education, which, in turn, is making colleges and universities more and more expensive. Whites and Asians from higher-income families are graduating in much higher numbers and with minimal debt, while college-grad blacks and Hispanics are mired in huge levels of debt.
How should society address this severe inequality in higher education?

  • Federal student loans should be limited to $30,000 for undergraduates and $60,000 for graduate students, the average amounts borrowed today for each category of student. Beyond these limits, students could still borrow from the private market, but with no subsidies or loan guarantees provided by the government. This single action alone will help to hold down college costs.
  • All students, and especially those from low-income families, should be encouraged to avoid excessive college debt. There are many high quality, low-cost educational institutions all around the country (e.g. UNOmaha where I teach) to meet their needs. It should be strongly emphasized that an expensive, prestigious institution is not needed to obtain a good education.