I voted for Hillary Clinton last November. Not because I liked her program. I was voting against Donald Trump. He is crude, sleazy and a terrible narcissist. I preferred John Kasich, Governor of Ohio, in the Republican Primary. But he didn’t make it. I voted for Mitt Romney in 2012 but he didn’t make it either.
The question now is whether or not the Trump Administration will effectively address our country’s two biggest problems, both of which are very serious and need urgent attention:
Slow economic growth, averaging just 2% per year since the end of the Great Recession in June 2009. Faster growth means a tighter labor market which in turn means more workers and higher wages. This in turn means less inequality. Furthermore, it is the United States’ dominant economic strength which assures world peace and stability. The Chinese economy, now half the size of ours, will catch us eventually. But stronger U.S. growth will delay this and enable us to cope with it better when it happens.
Massive Debt. The public debt of $14 trillion (on which we pay interest) is now 77% of GDP, (https://itdoesnotaddup.com/2017/01/31/trump-needs-a-wall-of-fiscal-discipline/) the highest since the end of WWII and steadily getting worse. With current low interest rates the debt is now essentially “free” money. But what will happen when interest rates return to normal historical levels? At this point interest payments on the debt will rise precipitously and become a huge drain on the budget. We can’t prevent this from happening but we can lessen the impact by acting now.
Will the Trump Administration take these two problems seriously?
For sure on economic growth. His re-election chances in four years depend largely on the fortunes of his base of blue-collar workers. His appointments at Treasury (Mnuchin), HHS (Price), and EPA (Pruitt) all support the tax reform and deregulation needed to get this done. I am confident that Trump will avoid a disastrous trade war.
The debt. This is trickier because Trump has said he won’t touch Social Security or Medicare. My optimism is based on the fact that the Debt Ceiling will be re-imposed on March 16 at its level on that date. This will give Congress just a few months to raise the ceiling to a higher level. It is likely that the many fiscal conservatives in the House will insist, in return, for some sort of spending restraint such as a ten-year plan to balance the budget.
Conclusion. We’re not out of the woods yet. But there is a clear path showing the way forward.
The Global Financial Crisis (GFC) was not part of the normal boom and bust cycle, but rather the collapse of the postwar economic expansion under the weight of four main factors: high debt levels, large global imbalances, excessive financialization and an unsound build-up of future entitlements.
The economy risks becoming trapped in a QE-forever cycle. A weak economy leads to expansionary fiscal measures and Quantitative Easing (QE). If the economy responds then interest rates will go up and lead to a debt crisis. If the economy does not respond, then there is pressure for additional stimuli.
The economist Robert Gordon predicts that the future U.S. growth rate, adjusted for six big headwinds (demographics, declining educational attainment, rising inequality, effects of globalization, environmental costs, and debt overhang) may only be .2%, well below the 2.1% growth rate of the past few years.
The GFC may signal the zenith of globalization. The U.S. could function successfully as a closed economy, with foreign trade making up only 15% of GDP. The European Union and China could also turn inward. The rise of autarky and nationalism is a dangerous cocktail.
Financialization drives inequality. QE and low interest rates encourages high-income households to increase investments and therefore boosts the stock market. The increasing cost of healthcare, higher education and childcare is a big burden on low-income households.
Financial repression is increasingly accompanied by political repression which engenders lack of trust which in turn drives political disengagement and social disorder.
Ouch, ouch, ouch! This is a very negative assessment of the U.S. economic and social scene today. But I report the views of Mr. Das because they are reality based and need to be dealt with.
Congress has adjourned for Christmas having passed a final budget for the 2016 Fiscal Year extending through next September. It puts into place for this year the two year spending agreement reached between Congress and the President in October. However Congress started out the year by passing a ten year budget plan resolution leading to a balanced budget by 2025. The budget just passed leads instead to a deficit of $1.1 trillion in 2025. Here are the details as described by the nonpartisan Committee for a Responsible Federal Budget:
Revenue: decreased under new budget by a $650 billion (over ten years) by making various temporary tax deductions permanent.
Discretionary Spending: increased by $50 billion for the current budget year (by breaking the sequester cap).
Medicare: instead of saving $430 billion over ten years, Medicare spending is increased by $95 billion over ten years.
2025 Deficit: instead of shrinking to zero in ten years, it is now projected to be more than $1 trillion in 2025.
2025 Debt: currently the (public, on which we pay interest) debt is 74% of GDP. The ten year balanced budget plan would reduce the debt to 56% of GDP. Instead, the debt is now on track to reach 80% of GDP by 2025.
Granted the Republican Congress hopes to develop a tax reform plan in 2016 which would lower tax rates for everyone, paid for by closing many of the loopholes and deductions just approved last week. One very good way to do this has recently been proposed by the Tax Foundation. The TF plan would boost economic growth and thereby increase tax revenue substantially over ten years.
The problem is that real tax reform is unlikely to happen without a Republican president in office. If a Democratic president is elected in 2016, then the dire predictions made by the CRFB (above) are likely to remain valid for the foreseeable future. Our fiscal and economic future remains quite precarious at the present time!
The postwar liberal consensus, beginning with President Roosevelt’s New Deal and extending through President Johnson’s Great Society, has broken down. The Reagan Revolution did not undo it and politics in the new 21st century have now become highly contentious with neither the Democrats nor the Republicans able to push their agendas very far. The Manhattan Institute’s James Piereson has written a book, “Shattered Consensus: The Rise and Decline of America’s Postwar Political Order,” describing how we have arrived at our current impasse. Most interestingly, he predicts that “the Democratic blue model is unlikely to succeed at restoring growth and dynamism to the American economy” and that a new system will necessarily look more like the red model than the blue model, i.e. more sympathetic to business and private sector growth than to public employee groups and beneficiaries of public spending.
There will likely be at least three central elements to the new synthesis that must eventually replace the postwar order. They are:
A focus on growth, and the fiscal and regulatory policies required to promote it, as an alternative to the emphasis on redistribution, public spending and regulation.
An emphasis on federalism both to encourage experimentation and innovation in the American system and to remove issues from the national agenda which contribute to division, stalemate and endless controversy.
A campaign to depoliticize the public sector by eliminating or strictly regulating public employee unions.
Mr. Piereson promotes these three new principles of political organization on their intrinsic merits. For me there is the added attraction that each one would also improve our perilous fiscal condition by significantly reducing budget deficits. Growing the economy faster will increase tax revenue. Strengthening federalism means transferring spending programs from the national government (which is highly wasteful) to state governments which are far more efficient because they have to balance their budgets. Public employee unions are especially costly to state governments because of their strong negotiating power.
In short, the cost of government simply must be brought under much tighter control and Mr. Piereson has proposed three organizing principles which would accomplish this.
In my opinion the two most serious problems facing the U.S. at the present time are 1) stagnant growth and 2) massive debt. As discussed by William Galston in yesterday’s Wall Street Journal, the U.S. presidential campaign is now beginning to address the first of these issues. For example:
Bernie Sanders rejects “growth for the sake of growth” and says that “our economic goals have to be redistributing a significant amount back from the top 1%.”
Hillary Clinton says that we have to build a “growth and fairness” economy. “We can’t create enough jobs and new businesses without more growth, and we can’t build strong families and support our consumer economy without more fairness.”
Jeb Bush argues that there is nothing wrong with household incomes that 4% growth wouldn’t solve.
The readers of this blog will have little difficulty figuring out where I stand on this continuum of economic values. My view is illustrated by the chart just below from the World Bank which shows that countries with the fastest growing economies also have the least amount of inequality. Let’s be more specific. Mrs. Clinton would achieve more fairness by:
Raising the minimum wage.
Guaranteeing child care and other family friendly policies.
Encouraging profit sharing.
Encouraging more innovation by increasing public investment in infrastructure, broadband, energy and scientific research.
These are attractive goals but how do we achieve them? The best way to raise wages is to get the economy growing so much faster that it creates a labor shortage. Then businesses will be competing for labor and wages will go up. This is exactly what is happening in Omaha NE where I live and the unemployment rate is down to 2.9% (2.6% in Nebraska as a whole).
Furthermore, in a tight labor market, businesses will automatically try harder to keep good employees by providing extra benefits such as childcare and profit sharing.
Public investment in infrastructure, etc. will be more easily affordable with the higher tax revenue generated by a faster growing economy. Conclusion: faster growth is the best way to create a more fair and equal society!
The New York Times columnist, Paul Krugman, writes provocatively on fiscal and economic issues and is well-known as a liberal icon. Usually I ignore his diatribes. But his column yesterday, “The Long-Run Cop-Out” goes way overboard. I will refute several of the statements from this column.
“Think about it: Faced with mass unemployment and the enormous waste it entails, for years the beltway elite devoted all most all its energy not to promoting recovery, but to Bowles-Simpsonism – to devising “grand bargains” that would address the supposedly urgent problem of how we’ll pay for Social Security and Medicare a couple of decades from now.” Worrying about our enormous and rapidly increasing national debt, does not mean ignoring our sluggish economy and the high unemployment it causes. The way to increase economic growth is to enact broad based tax reform by lowering tax rates, offset by closing loopholes and limiting deductions. This will further boost the economy in the same way that lower gasoline prices is already doing.
“Many projections suggest that our major social insurance programs will face financial difficulties in the future (although the dramatic slowing of increases in health costs makes even that proposition uncertain).” Healthcare costs dropped to 4.1% in 2014 but this is still more than double the inflation rate of 1.7%. This isn’t nearly good enough.
“Why, exactly, is it crucial that we deal with the threat of future benefit cuts by locking in plans to cut future benefits?” The point is to protect benefits, not curtail them. If we act now, to increase revenue and/or slow down the growth of entitlement spending, then we won’t have to cut future benefits.
“So why the urge to change the subject (from austerity) to structural reform? The answer, I’d suggest, is intellectual laziness and lack of moral courage.” $6 trillion added to our debt in the last six years is profligacy, not austerity. It is immoral to burden future generations with such massive new debt.
“In today’s economic and political environment, long-termism is a cop-out.” Preparing for the future is just plain common sense. Should we ignore festering problems like global warming, illegal immigration and increasing poverty until they get much worse? Of course not. We should address these problems now and get our debt under control at the same time.
The Congressional Budget Office has a sterling reputation for collecting accurate data and making credible predictions about basic economic and fiscal trends. CBO analyses, which are based on current law, are generally accepted as valid by both liberals and conservatives. Considering the degree of hyper-partisanship in most discussions of fundamental policy, it is reassuring to at least have an unimpeachable source of basic information. CBO has just released its regular annual report, ”The Budget and Economic Outlook: 2015-2025.” There is good news for the near term. As shown above, GDP is projected to grow by 2.9% in the (budget) years 2015 and 2016, and dropping to 2.5% growth in 2017, which is still better than 2014. This means that our national debt will not grow from its current level of 74% of GDP for the next few years and might even decrease slightly. Growth will then hover around 2.2% for the remainder of the 2015 – 2025 decade, which is the average GDP since the end of the Great Recession in June 2009. Likewise, unemployment will likely not fall much below its current value of 5.6% for the next ten years. In short, under current policy, except for the next couple of years, we are stuck in the same slow-growth rut where we have been for the past five and one-half years.
It should be obvious that we need new policies to speed up growth, put more people back to work, and raise the stagnant wages endured by many middle- and lower-income workers. How can this be accomplished?
Tax reform, both individual and corporate, is the primary route to faster growth. Lower tax rates across the board, paid for by closing loopholes and shrinking deductions. This will put extra income in the pockets of the 64% of taxpayers who do not itemize deductions, which they will likely spend. It will also make it easier for potential entrepreneurs to successfully launch a new business.
Immigration reform, expanded foreign trade and deregulation will also create more business opportunities which will in turn grow the economy and create more jobs.
Hopefully the new Congress will be able to move forward in this direction. A better future depends on it!
I have recently become a volunteer for the national bipartisan organization, Fix the Debt. It is the outreach arm for the Washington think tank, Committee for a Responsible Federal Budget, which is an offshoot of the Simpson-Bowles Commission from several years ago.
As such, I give presentations to local civic organizations about our national debt and what needs to be done to get it under control. Typically the audience will readily appreciate the seriousness of our debt problem. What they want to talk about are practical ways to address it. They have their own ideas and want to know what I think as well. My first message is that we don’t have to pay off the debt or even balance the budget going forward. Realistically we need to shrink our annual deficits in order to put the debt on a downward course as a percent of our growing economy, as shown in the chart just below.
It will be a huge challenge to accomplish even this! Here are my ideas, in very general outline, on how to get this done:
Entitlements (Social Security, Medicare and Medicaid) are the biggest single problem because our population is aging so fast. Furthermore, in order to control the growth of Medicare and Medicaid, we have to do a much better job of controlling the overall cost of healthcare in the U.S. For example, even though healthcare costs slowed down to an increase of only 4.1% in 2014, this is still more than twice the rate of inflation!
The second thing we need to do is to make our economy grow faster than the roughly 2.3% growth we have achieved since the end of the Great Recession. The main way to get this done is through broad-based (and revenue neutral) tax reform at both the individual and corporate levels, by reducing tax rates, paid for by closing loopholes and limiting deductions.
Finally, there is enormous waste and inefficiency in the federal budget, with huge redundancy and overlap of programs between different federal departments. Responsibility for such programs as education, community development, transportation and social welfare, for example, should be returned to the states with block-grant funding to replace rigid federal control.
I have discussed each of these major reform ideas in much detail in previous blog posts and will continue to do so. As large as our fiscal problems are, I remain optimistic that they can and will be successfully addressed.
In the national elections this year four states: Alaska, Arkansas, Nebraska and South Dakota raised their state minimum wage rates above the national rate of $7.25 per hour and, at the same time, elected Republicans to the U.S. Senate, in three cases replacing Democratic incumbents. Does this represent contradictory behavior by the voters? The American Enterprise Institute’s James Pethokoukis recently reported (see above) that the U.S. has the third highest rate of billionaire entrepreneurs behind only Hong Kong and Israel, as well as by far the most billionaires over all. These are the high-impact innovators like Bill Gates, Steve Jobs and Mark Zuckerberg and the Google Guys.
These observations are put in context by the Manhattan Institute’s Scott Winship who recently reported that “Inequality Does Not Reduce Prosperity.” Here is a summary of his findings:
Across the developed world, countries with more inequality tend to have higher living standards.
Larger increases in inequality correspond with sharper rises in living standards for the middle class and poor alike.
In developed nations, greater inequality tends to accompany stronger economic growth.
American income inequality below the top 1 percent is of the same magnitude as that of our rich-country peers in continental Europe and the Anglosphere.
In the English-speaking world, income concentration at the top is higher than in most of continental Europe; in the U.S., income concentration is higher than in the rest of the Anglosphere.
With the exception of a few small countries with special situations, America’s middle class enjoys living standards as high as, or higher than, any other nation.
America’s poor have higher living standards than their counterparts across much of Europe and the Anglosphere.
Conclusion: Americans are fair-minded and would like to help the working poor do better. But Americans also appreciate the value of innovation and entrepreneurship. When there is a tradeoff between increasing prosperity and reducing inequality, greater prosperity comes first.
“I could end the deficit in 5 minutes. You just pass a law that says anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.” Warren Buffett, 1930 –
Mr. Buffett made this quip in a recent interview with CNBC. Since the economy has historically grown at a rate of about 3%, Mr. Buffett is saying that we’ll be alright as long as economic growth exceeds deficit spending. This is generally correct but, as Mr. Buffett well knows, the situation is more complicated than this. A very good, and nontechnical, discussion of this whole subject can be found in the newly published book, “The Death of Money: the coming collapse of the international monetary system” by the financier James Rickards. Look at Chapter 7, “Debt, Deficits and the Dollar.”
Simplifying Mr. Rickards’ approach a little bit, and keeping it in Mr. Buffett’s framework, for a stable economy we need to have
G > D
where the nominal growth G = real GDP + I (I is the rate of inflation) and the deficit D = S – T (S is spending and T is tax revenue). I have included interest paid on the debt as part of total spending. As long as the left hand side is greater than the right hand side, the economy is growing faster than the deficit and the accumulated debt will shrink as a percentage of GDP. Notice that the rate of inflation affects the left hand side of the inequality while the interest rate is part of the right hand side.
Negative inflation is deflation which is clearly undesirable. The Federal Reserve’s current target for inflation is 2%. The challenge for the Fed is 1) to keep inflation high enough and interest rates low enough so that G > D, while at the same time, 2) to make sure that inflation does not grow so high as to destabilize the markets.
Given our underperforming economy with low real GDP growth, and huge deficits, Mr. Rickards is pessimistic that the Fed can continue successfully “in the position of a tightrope walker with no net … exuding confidence while having no idea whether its policies will work or when they might end.”
Thus the gloomy title for his book.