Category Archives: federal spending

What Should the Republicans Do Now?

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An editorial in yesterday’s Wall Street Journal, “A GOP Shutdown Strategy”, offers good advice to the House Republicans for how to proceed in the shutdown stalemate.  “ …the best chance to move Democrats is Louisiana Senator David Vitter’s amendment that would annul the exemption from Obama-Care that the White House carved out for Congressmen and their staff.  These professionals will receive special subsidies unavailable to everybody else on the insurance exchanges, and preserving this deeply unpopular privilege would be a brutal vote for Democrats.”
The House Republican Caucus should attempt to line up 218 votes to attach this provision to a continuing resolution to fund the government for all or part of the new fiscal year at the current level.  If 218 votes to support this approach cannot be found, then the House should pass a clean funding resolution.  Nothing else has a chance of succeeding (the idea of trying to defund Obama-Care for even one year is absurd) and the American people will grow increasingly impatient. 
The bigger issue by far is the need to raise the debt limit by October 17th at the latest.  Here the Republicans have major leverage, namely the sequester, which takes a bigger bite out of discretionary spending each year for nine more years.  The Republican House can give the Democratic Senate a choice:  either agree to a sensible long range plan for spending restraint (including entitlements), or else we’ll agree to raise the debt limit for six months or so, into early 2014, and then revisit the debt limit issue after the 2014 tighter sequester limits take effect. 
This is what I suggest.  Now we’ll wait and see what happens!

A Pessimistic View of America’s Future IV. The Age of Oversupply

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Today’s New York Times has an interesting Op Ed column by Daniel Alpert, a partner at the investment bank, Westwood Capital, LLC, “The Rut We Can’t Get Out Of” .  It is based on Mr. Alpert’s new book, “The Age of Oversupply: Overcoming the Greatest Challenge to the Global Economy”.
“Hundreds of millions of people who once lived in sleepy or sclerotic statist and socialist economies now compete directly or indirectly with workers in the United States, Europe and Japan, in a world bound by lightning-fast communications and transportation,” says Mr. Alpert.
During the “Great Moderation,” beginning in the early 1980’s, with the tech bubble of the 1990’s and the housing bubble of the 2000’s, we could ignore this threat from the developing world.  But now, after the financial crisis and the Great Recession which followed, this huge new source of global competition for jobs and cheap goods is a drag on our recovery.
Mr. Alpert’s main prescription for recovery is to put the unemployed back to work “by any means, including big public sector investments to improve infrastructure and competitiveness.”  He would do this with massive new deficit spending, arguing that U.S. debt is not a serious problem in the short term.
I agree with his argument that the global oversupply of workers, money and goods is a huge threat to future prosperity.  Where I disagree is when he says that faster economic growth is more important than controlling deficit spending.
In my opinion, “America’s existential threat is fiscal” (Glenn Hubbard and Tim Kane).  In other words, as important as it is to boost the economy and create more jobs, and this is very important indeed, it is more urgent to get deficit spending under control and to do this quickly.  We can actually accomplish both of these critical tasks simultaneously, as I discussed in my post of September 20, 2013.

Our Dire Fiscal Situation II A Promising Solution

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As I discussed in my last post, the Congressional Budget Office has shown very clearly that the U.S. is on an unsustainable fiscal path which must be reversed in order to avoid calamity.  We are spending too much money and not taking in enough tax revenue.  In a recent Wall Street Journal Op Ed column, the economist Martin Feldstein describes “How to Create a Real Economic Stimulus”.  “A successful growth and employment strategy would combine substantial reductions in the relative size of the future national debt with immediate permanent tax rate cuts and a multiyear program of infrastructure spending…….The only way to reduce future deficits without weakening incentives and growth is by cutting future government spending.”
Mr. Feldstein proposes slowing the growth of benefits of middleclass retirees by gradually raising the full benefit retirement age for Social Security from 67 to 70 and also raising the age of Medicare eligibility to the same level.  This would create a budget savings of 1% of GDP, or $200 billion, by 2020.   Rather than eliminating such popular tax deductions as the one for mortgage interest or the exclusion of employer payments for health insurance, he recommends limiting the amount by which individuals can reduce their tax liabilities to 2% of adjusted gross income.  This single change to the tax code would, for example, reduce the 2013 deficit by $140 billion.
In addition to lowering tax rates for individuals, corporate tax rates should be cut from 35% to about 25% in order to be competitive with other industrial countries.  We should also adopt the internationally common “territorial” system which doesn’t tax foreign earnings brought back home.
In short, we decrease spending and raise revenue with entitlement reforms and a limit on tax expenditures thereby creating a framework for tax rate reductions and infrastructure spending.  These are the sorts of bold measures needed to produce a real stimulus and thereby get our economy back on track!

The College Education Bubble

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A recent article in the Wall Street Journal by the expert on the economics of higher education, Richard Vedder, “The Real Reason College Costs So Much”, points out the similarities between the government’s higher education and housing policies.  “In housing we had artificially low interest rates.  The government encouraged people with low qualifications to buy a house.  Today we have low interest rates on student loans.  The government is encouraging kids to go to college who are unqualified just as it encouraged people to buy a house who are unqualified.”
The federal government is now spending $105 billion on student loans each year.  The average student loan debt is $26,000 but goes much higher for millions of students.  The maximum annual Pell Grant (intended for low income students) is now $5350 and 20% of the recipients come from families making over $60,000 per year.
President Obama suggests capping monthly loan repayments at 10% of discretionary income and forgiving outstanding balances after 20 years.  This creates a moral hazard.  It signals to current and future loan borrowers that they don’t have to take loan repayment very seriously.  It encourages students to major in “soft” academic areas which have poorer job prospects rather than “hard” areas like engineering and technology which have good job prospects.
Innovation in higher education is not coming from government programs but from private initiatives such as massively open online courses (MOOCs).  These have the potential to greatly reduce college costs.  Community colleges have rapidly growing enrollments and prepare students for skilled jobs in high demand areas such as truck driving, machine technology and health careers.
The cost of higher education is going up much faster than the rate of inflation and the infusion of federal money is making the situation worse by encouraging students to take on excessive amounts of debt.  A cap should be placed on the amount of government money which can be borrowed by an individual student.  There are plenty of low cost options available for obtaining postsecondary education and government policy should support, rather than subvert, such common sense options.

How To Do Intelligent Budget Cutting in Washington

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The July/August 2013 issue of the Atlantic Magazine has an article “Can Government Play Moneyball?”, by two former budget officials, Peter Orszag (under President Obama) and John Bridgeland (under President Bush), which describes the very careless spending atmosphere in the federal government in recent years.  “Based on our rough calculations”, they write, “less than $1 out of every $100 of government spending is backed by even the most basic evidence that the money is being spent wisely.”  They describe in great detail their efforts to introduce mechanisms to evaluate the performance of social service programs of various types and how difficult this has been to accomplish.
“Since 1990, the federal government has put 11 large social programs, collectively costing taxpayers more than $10 billion a year, through randomized controlled trials, the gold standard of evaluation.  Ten out of the eleven – including Upward Bound and Job Corps – showed “weak or no positive effects on their participants.”  Here’s another example.  “The federal government’s long running after school program, 21st Century Community Learning Centers, has shown no effect on academic outcomes on elementary-school students – and significant increases in school suspensions and incidents requiring other forms of discipline.  The Bush administration tried to reduce funding for the program” but was overruled by Congress.  “Today the program still gets more than $1 billion a year in federal funds.”
Lots of people complain that the sequester is a “dumb” way to cut federal spending.  Of course, it would make far more sense to cut back spending in a rational way by evaluating all programs, keeping the effective ones and eliminating the ineffective ones.  As the sequester takes bigger and bigger across-the-board spending cuts each year for nine more years (it’s a program to cut $1 trillion over ten years), the big spenders in Congress are going to start crying “Uncle”! because their own favorite programs will be effected more and more deeply each year.  Maybe then, hopefully sooner than later, Congress will gain some collective common sense and accept the fact that there is a better way to make the significant budget cuts that are necessary.
Let’s hope so!

Education Reform Is Speeding Up

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A front page article in yesterday’s Wall Street Journal, “Biggest Changes in a Decade Greet Students in Classroom”, discusses many new and recent developments in K-12 education.  The controversial Common Core, with tougher math and reading standards, has been adopted by 45 states.  A total of 41 states have agreed to link teacher evaluations to test scores or other student achievement measures and 15 states use, or plan to use, an A – F grading scale to rate schools.  Last year there were 5997 charter schools, up from 2559 during the 2002-2003 school year.
What all of this means is that states are hotbeds of educational experimentation.  Meanwhile Congress is trying to figure out how to replace the unpopular No Child Left Behind law which was enacted in 2002 and has been renewed on a year by year basis since it expired in 2007.  Both the Senate and the House are currently considering legislation to give individual states more flexibility in figuring out how to increase educational success.
The fiscal implications of this whole movement of educational reform and decentralization are huge.  The U.S. Department of Education has over 100 separate programs for K-12 education alone, involving massive duplication and inefficiency, with a combined budget of $100 billion per year.  A smaller total amount of money could be given directly to the states in the form of block grants devoted to education.  The states are able to spend the money more effectively than the federal DoE and at less total cost.  Conclusion: better results for significantly less money.
This helps reduce the deficit!

Can We Solve Our Fiscal Problems Without Raising Taxes?

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Scott Lilly, a Senior Fellow at the Center for American Progress, has an Op Ed column in yesterday’s Fiscal Times, “The Choice Congress Won’t Face Up To”.  Mr. Lilly admits that we have at least a long-term deficit problem, namely exploding entitlement spending driven by the aging of the U.S. population.  The Congressional Budget Office predicts that federal outlays, including entitlements, will be 22.8% of GDP in 2023 while revenues will equal only about 19.3% of GDP, a huge gap.  And outlays will continue to rise,  because of entitlement spending, reaching 25% of GDP by 2040.  This means that the public debt, on which we pay interest, would rise from 73% of GDP today, to 99% of GDP by 2040.  As interest rates inevitably return to their historical average of 5%, interest payments on this massive debt will become an increasing burden on the economy.
Mr. Lilly asks the question:  How are we going to cut back on entitlement spending when the average Social Security monthly check is $1268 out of which about $350 goes to out-of-pocket medical expenses not covered by Medicare?  Congressman Ryan has proposed limiting the growth of Medicare to the increase of inflation + 1%.  But the cost of healthcare is increasing much faster than this.  And many seniors are living close to the edge.
Thus we reach “the choice which Congress won’t face up to.”  According to Mr. Lilly, either we have to make big cuts in entitlement spending or else raise taxes dramatically so that federal revenue increases to about 24% of GDP by 2040.  Mr. Lilly makes the far-fetched claim, based on flimsy evidence, that such a large tax increase will not retard economic growth.  But let’s set this issue aside for now.
Is there any alternative to increasing taxes so dramatically in order to avoid making big cuts in entitlements?  The answer is yes.  The above discussion assumes that the cost of healthcare in general will keep on increasing at the current rapid rate, much faster than the increase in inflation.  This is the main driver of entitlement costs.  The U.S. currently spends 18% of GDP on healthcare which is double the amount spent by any other country.  This is what must change.  We should abolish, not just postpone, the employer mandate in Obama Care.  But even more fundamentally, the tax exemption for employer provided healthcare should be removed (and offset with a rate reduction).  This would make consumers far more aware of the cost of healthcare and therefore drive down these costs.
Only after serious attempts are made, such as above, to control costs should any consideration be given to raising taxes.

Federal Cutbacks Suggest State and Local Expansion

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A front page article in yesterday’s Wall Street Journal, “An Ohio Prescription for the GOP:  Lower Taxes, More Aid for Poor”, describes how Ohio’s Republican Governor, John Kasich, a former congressional spending hawk, has expanded Medicaid coverage in Ohio and steered millions more dollars into local food banks.  Mr. Kasich says, “When you die and go to heaven, St Peter is probably not going to ask you much about what you did about keeping government small.  But he is going to ask you what you did for the poor.”
There are good reasons why we should shift programs and responsibilities from the federal government back to states and localities.  At the federal level there is little fiscal restraint and therefore little incentive for making sure that governmental programs operate efficiently and effectively.  Study after study by the Government Accounting Office, as well as by private think tanks, demonstrate enormous waste and duplication in virtually all areas of federal government.  This long lasting fiscal irresponsibility at the federal level has now led to a massive national debt which will have a perverse effect on our nation’s prosperity for many years to come.
At the same time, all state and local governments are required to balance their budgets.  This means that they have to pay attention to the costs of all programs and set spending priorities.  They have to make sure that all functions of government are effective and be prepared to cut back or eliminate any program which is performing poorly.  States such as Illinois and California, and cities such as Detroit, Chicago and Philadelphia, which have huge operating deficits year after year, will eventually be forced to declare bankruptcy (such as Detroit has just done) in order to reorganize their finances and make a fresh start.
It has long been a practical axiom that government should be as close as possible to the people.  But now it is a fiscal necessity as well to shift as much as possible from federal control back to state and local control.

Keep Squeezing the Budget!

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Monday’s Wall Street Journal has an Op Ed column by Stephen Moore, “The Budget Sequester Is a Success”, which points out that federal spending has actually shrunk from a high of $3.598 trillion in 2011 to $3.537 trillion in 2012 to a projected $3.45 trillion for 2013.  These spending declines are due to the Budget Control Act of 2011 which accompanied the 2011 increase in the debt limit.  The $100 billion per year budget sequester is a part of that agreement.  The current budget standoff between the Senate and the House is simply an attempt by the Democratic majority in the Senate to renegotiate the spending limits agreed to in 2011.
The sequester will continue to constrain discretionary spending but the two thirds of the federal budget devoted to entitlements is growing at a much faster rate than the overall growth of the economy.  The way out of this dilemma should be obvious to any rational, impartial observer.  We need to slow down the growth of entitlements and speed up the growth of the economy.  But this is much easier said than done!
Democrats will apparently not agree to do either of these two things.  Reining in entitlements takes political courage and the Democrats would rather be able to accuse Republicans of cruelty to the poor and the elderly than to actually address this problem in a serious manner.  Growing the economy faster will require appealing to investors and risk takers, with lower tax rates, for example, as well as loosening anti-business regulations.  Measures like these go against liberal ideology.
While we’re waiting for common sense to prevail in Washington, what more can be done to shrink still very large deficit spending?  There are all sorts of wasteful, duplicative and ineffective federal programs out there.  Fiscal conservatives should just keep going after them, one-by-one, and whittling them down.  Millions of voters and taxpayers will be thankful for this.

One Way to Solve the National Debt Problem

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In today’s New York Times, the economists Glenn Hubbard and Tim Kane write that “Republicans and Democrats Both Miscalculated”.  They say that “when the Congressional Budget Office recently lowered its forecast of future deficits, many voices on the left claimed that the problem had been overblown by ‘austerity scaremongers’” and that “some voices on the right have renewed calls to ‘starve the beast’ now that deficits are under control.”  But they point out that just because the deficit is likely to shrink for the next couple of years, CBO also projects that it will soon be back up to a trillion dollars per year indefinitely into the future.  And this is all optimistically assuming full employment, robust growth and moderate interest rates.
The Hubbard/Kane solution is to amend the Constitution with a flexible Balanced Budget Amendment.  Its features would include: 1) a provision that spending in a given year would not exceed income averaged over the previous seven years, 2) no restriction on tax rates which would have to be hashed out by Congress and 3) an exception to spending restraint for national emergencies.
There are, of course, valid objections to a Balanced Budget Amendment to the Constitution.  It reduces the flexibility of Congress and the President to act as needed.  It would be much better for Congress to act in a fiscally responsible manner on its own initiative.  But we all know that this doesn’t happen.  The pressure is always to adopt new spending programs and never to cut existing programs, no matter how ineffective they are.
Debt is the “single biggest threat to our national security” declared Admiral Mike Mullen, the former Chairman of the Joint Chiefs of Staff.  Many other prominent citizens express similar thoughts on a regular basis.  It is really just basic common sense that no governmental unit can flagrantly ignore this fundamental economic principle year after year without very serious repercussions.  It is (well past) time to force our national leaders to bite the bullet and do what almost every sane person knows what must be done.