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!

Nebraska Senator Deb Fischer Is a Big Spender

 

Senator Fischer is up for re-election in 2018 and she starts out a recent fund raising letter (see below) as follows: “My goals are clear: stronger national defense, safer roads and bridges, healthcare that is accessible and affordable, protection of our fundamental liberties, less government, and a fairer, simpler tax code.” Here’s the breakdown:

  • First, and most important: national security.
  • Second, our roads and bridges must be repaired and rebuilt.
  • Third, Obamacare must be repealed and replaced.
  • Fourth, our fundamental liberties must be protected.
  • Fifth, government must shrink and the tax code must be simpler and fairer.

I don’t disagree with the specifics of any of these five goals but rather where the emphasis is placed. Her first two goals are to greatly increase spending for both the military and for infrastructure projects.  Her last goal is to shrink the federal government which is a good idea but very hard to accomplish in practice.

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Here is the basic problem our national debt (the public part on which we pay interest) is now at 77% of GDP, the highest it has been since right after WWII, and steadily getting worse.  Right now this approximately $14 trillion debt is essentially “free” money because interest rates are so low.  But when interest rates inevitably rise to more normal levels, interest payments on the debt will soar by hundreds of billions of dollars per year and eat much more deeply into tax revenue.
It should be a very high priority for Congress to establish a plan to bring government spending more closely in line with tax revenue.  I have previously described how this could be accomplished over a ten year period without cutting hardly anything but simply using restraint for spending increases.

Conclusion. If Senator Fisher feels that it is necessary to make big spending increases in areas such as national defense and infrastructure repair, then she should be equally adamant about the need to hold down the growth of government spending overall.

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What, if Anything, Will Restrain Donald Trump?

 

The Atlantic magazine has just released a remarkable essay written by the political commentator, David Frum, entitled, “How to Build an Autocracy.”  Says Mr. Frum, “Donald Trump will not set out to build an authoritarian state.  His immediate priority seems likely to be to use the presidency to enrich himself.  But as he does so, he will need to protect himself from legal risk.  Being Trump, he will also inevitably wish to inflict payback on his critics.  Construction of an apparatus of impunity and revenge will begin haphazardly and opportunistically.  But it will accelerate.  It will have to.”

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Let’s assume that Mr. Frum is correct that Trump’s top priority is to enrich himself.  What will stop him from doing this?  A recent column in the New York Times points out that:

  •  54% of registered voters in congressional districts represented by Republicans view Mr. Trump favorably compared with only 42% who view him unfavorably.
    In these same districts, 87% of registered Republicans view Mr. Trump favorably.
  • In other words, the Republican dominated Congress is unlikely to strongly oppose his sleazy and self-enriching behavior.

But there are other constraints on what he does in office:

  • As I said in a recent post in order for Mr. Trump to be reelected in 2020, he will need to substantially speed up economic growth in order to increase the wages of his key blue-collar supporters. He clearly wants to accomplish this.
  • On the other hand, the conservative Republican base, including its representatives in the House such as the Freedom Caucus, will simply not support huge increases in deficit spending for anything (except an emergency) including infrastructure, the military or unfunded tax cuts.
  • In fact, Rep Mick Mulvaney (R, SC), a deficit hawk, has been nominated to become the Trump Administration’s Budget Director. In March the debt ceiling will have to be raised. I expect the many fiscal conservatives in Congress to insist on significant fiscal restraint (e.g. a ten year plan to balance the budget) as a tradeoff for raising the debt ceiling.

Conclusion. Just because Republicans are tolerant of Mr. Trump’s personal behavior does not mean he can successfully ignore the strong Republican desire for fiscal restraint.

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Donald Trump Needs a More Positive Message

 

As regular readers of my blog posts know, I am not enthusiastic about either of our two main presidential candidates because neither of them has a good grasp of our two biggest economic problems which are:

  • Slow economic growth, averaging just 2% per year since the end of the Great Recession in June 2009. Faster growth would solve or alleviate many other problems, especially by creating more new jobs as well as delivering faster wage growth for all middle- and lower-income workers.
  • Massive debt now at 75% of GDP, the highest it has been since right after WWII, and projected by the Congressional Budget Office to get steadily worse unless big changes are made in spending and tax policies. Such major changes are difficult to make without presidential leadership.

Hillary Clinton promises “equitable” growth but her policy proposals will lead to a big increase in spending (bad idea) on projects of dubious value in speeding up economic growth. Donald Trump would hurt the economy with immigration controls and trade restrictions.  His proposal for lower tax rates (good idea) needs much improvement to avoid increasing annual deficits.
capture40Mr. Trump’s biggest problem, however, is his negative message about life in America today. Yes, we need stronger border security but we don’t need a Fortress America.  As the American Enterprise Institute has just reported, worker satisfaction is greatly improved since 2009 and workers are now much less anxious about job security than just a few years ago.
There is a really good way for Mr. Trump to sound a more positive note.  He could very easily take up the major themes of the Republican House Plan, “A Better Way” for solving America’s major economic problems.
Conclusion. There is an overwhelming desire for change in America, for new leadership which breaks out of the corruption, cronyism and elitism so rampant in Washington DC today.  But Americans are natural optimists and want a leader who can look forward to a bright future for our country.

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Can U.S. Economic Growth Be Speeded Up?

 

It is widely recognized and deplored, see here and here, that economic growth in the U.S. has been very slow, averaging only 2% per year, since the end of the Great Recession in June 2009.
The Federal Reserve has taken unprecedented steps to limit the severity of the recession by holding down both short term and long term interest rates.  But these efforts are only partially working and are, unfortunately, having a number of negative effects as well.
It also has been made quite clear that the problem is supply side and not demand side.  This is because, on the one hand, wages are beginning to rise more quickly and consumers are spending more money but, on the other hand, business investment is shrinking which is leading to slow productivity growth.
Capture38The American Enterprise Institute’s James Pethoukoukis has just provided new data  on the current weakness of business investment as illustrated in the above chart. Furthermore he quotes the economist, Robert Gordon, who has clearly described the many headwinds holding back the U.S. economy to the effect that:

“The American tax code exerts a downward pressure on capital formation and therefore on economic growth. It is now 30 years since the passage of comprehensive federal tax reform in the U.S.  In the intervening years, nearly every developed country has reformed its tax codes to make them more competitive than that of America.  Meanwhile the U.S. has allowed its tax code to atrophy.”

Conclusion. Yes, economic growth can be speeded up. But monetary policy won’t do the trick.  Congress must intervene with the right changes to fiscal policy, i.e. lowering tax rates for both individuals and corporations, paid for by closing loopholes and shrinking deductions.

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Janet Yellen vs Larry Summers

 

There is an informative article in the May 12, 2016 issue of Bloomberg Businessweek, “How to Pull the World Economy out of Its Rut.”  Recall that Janet Yellen succeeded Ben Bernanke as Chair of the Federal Reserve in January 2014. The other candidate for the post was Larry Summers.
Capture6They have rather different views about the role of a central bank:

  • Janet Yellen insists that economic conditions are returning to normal, even if slowly. She is neutral about the slow growth, secular stagnation hypothesis and using fiscal stimulus to overcome it.
  • Larry Summers argues that world growth is stuck in a rut because there is a chronic shortage of demand for goods and services. Growing inequality puts a bigger share of the world’s income in the hands of rich people who spend less. The new economy is asset-lite (Uber and Airbnb prosper by exploiting existing assets) and so needs less investment. Software doesn’t require the construction of new factories. He thinks that central bankers should spend more time and effort trying to influence fiscal policy. For example, more government spending on infrastructure, global warming and improving education. Also changing the tax code to put more money in the hands of lower- and middle-income families who would spend it.

I think that they are both partly right and partly wrong.

  • Janet Yellen is correct in believing that the Fed should stick to monetary policy. But she is too cautious in raising interest rates back to more normal levels. There will be some (stock market) pain in accomplishing this but it needs to be pushed faster regardless.
  • Larry Summers is correct in calling for action on the fiscal front. But his suggestions for how to do this are mostly off base because they will lead to massive new debt which must be avoided.

So what is the proper course to get out of our economic rut? It is what I’ve been saying over and over again but I’ll repeat it for good measure in my next post!  Stay tuned!

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Why the GOP Should Reconcile with Donald Trump

 

I am a non-ideological fiscal conservative. I don’t judge government as being either too large or too small.  I just want to pay for however much government we do have without going into debt.  Such an approach normally leads to political compromise whereby Congress tries to operate efficiently and hold costs down, only raising taxes as a last resort when it is impossible to squeeze any more low priority programs out of the system.
Such common sense used to be a fundamental operating principle, adhered to by both political parties.  Unfortunately in recent years we have moved away from this model.  In fact our public debt (on which we pay interest) has rapidly accumulated to $13 trillion, 74% of GDP, and will continue to grow much higher unless we strongly change our ways.
In some ways our current presidential campaign is following a conventional path.  Both of the major Democratic candidates, Hillary Clinton and Bernie Sanders, want to expand federal programs and raise taxes to pay for the new spending.  The Republican Tea Party candidate, Ted Cruz, is a constitutional and social conservative and wants to cut back on government programs.  The leading Republican establishment candidate, Marco Rubio, supports modest new programs, such as expanding the Earned Income Tax Credit, and also modest tax reform to stimulate the economy.
Capture0The wild card in the presidential race is Donald Trump.  He is a secular populist with unconventional and even contradictory policy views.  He not only leads the Republican field in most polls, he is steadily pulling ahead.  He is doing all this by attracting huge support from working class white voters who have fallen away from the Democratic Party.  In other words, he is potentially expanding the Republican base and therefore should be taken very seriously.
Question. Can a fiscal conservative (who just wants to balance the budget!) but who also wants to address the very serious social problems in American society, support a Donald Trump candidacy for president?  I am struggling with this question.  Stay tuned!

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