What Do I Mean When I Say I’m a Fiscal Conservative?

 

Americans are a very fortunate people. We are protected by two oceans and friendly neighbors to our north and south.  We are the strongest country in the world, both economically and militarily.  We provide the world with cutting edge leadership in many areas such as technology, finance, energy production, scientific research and university education.
In short we live in a very successful, prosperous and complex society.  We do have serious problems but they are being addressed by our elaborate legal and governmental processes and structures. Slowly but surely life in America is getting better and better all the time.
Given our country’s size, complexity and dominance in the world, it is inevitable that government will also grow in size and structure in order to take on new responsibilities. It is completely unrealistic to think that we can return to a more limited form of government that existed in the past.
When I say, then, that I’m a fiscal conservative, I am not advocating for less government but merely that we pay for the government that we have, in other words, act in a fiscally responsible manner.


And we are not doing this at the present time:

  • Our national debt, now 77% of GDP (for the public debt on which we pay interest), is the highest since right after WWII. It is predicted by the Congressional Budget Office that it will keep steadily getting worse without major changes in current policy.
  • The urgency of the debt problem is based on the fact that interest rates are now so low that it is almost “free” money. But interest rates will inevitably return to more normal historical levels and, when this happens, interest payments on the debt will skyrocket. Eventually this will lead to a Fiscal Crisis, much worse than the Financial Crisis of 2008.
  • The solution to this problem need not be drastic. Federal spending is growing by 5% per year while tax revenues are growing by 3% per year. If we would just hold spending increases down to 2.5% per year, the federal budget would be balanced in a few years and our debt would start shrinking as a percentage of GDP.

Conclusion. Spending restraint, with very few actual spending cuts, is all that it will take to put our debt problem on a path to solution. Surely we are capable of acting in a fiscally responsible manner like this!

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The Major Challenges Facing the United States

 

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?

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The Need to Put Medicaid on a Budget II. Our Growing Debt

 

Most of the controversy generated by the healthcare bill passed by the House, and the one now being considered by the Senate, concerns the way Medicaid is funded. The current system whereby states are reimbursed by the federal government for a percentage (national average 53%) of their Medicaid expenses would be replaced by putting the federal contribution on a strict per-capita basis, indexed to the annual rate of inflation.
Medicaid is a vast program now serving 73 million low-income and disabled Americans and is doing a good job especially for the elderly and the disabled with special needs. But it costs the federal government nearly $400 billion per year and the cost is growing rapidly.  It is essential to get open-ended Medicaid spending under much better control and one good way to do this is to put the federal contribution on a fixed budget.


The Congressional Budget Office has just issued its latest Budget and Economic Outlook report.  It shows the ever-worsening fiscal condition for the U.S., unless current policy is changed.


For example:

  • The deficit for 2017 is predicted to be $693 billion or 3.6% of GDP.
  • Deficits will grow dramatically over the next decade with trillion dollar deficits returning by 2022.
  • Debt held by the public (on which interest is paid) will grow by $11.2 trillion between now and 2027, from $14.3 trillion today.
  • Spending will grow from 20.9 percent of GDP in 2016 to 23.6 percent in 2027, while revenues will rise from 17.8 percent in 2016 to 18.4 percent by 2027.
  • The vast majority of spending growth over the next decade (83%) is the result of rising costs for health care, Social Security, and interest on the debt.

    Conclusion.  
    The national debt is growing much too fast. The only way to turn this dangerous situation around is to reform all entitlement programs, including Medicaid, to get their costs under much better control.

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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!

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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