President Trump has proposed spending $1 trillion over the next decade on public and private investment in infrastructure. The CATO Institute’s Ryan Bourne has just published an excellent analysis of the whole issue. Here are the highlights:
Any new federal spending must take into account that federal public debt now stands at 77% of GDP and is likely to keep rising given the demographic pressures on entitlement spending. This means that the long-term outlook for public finances is dire.
With a current low unemployment rate of 4.4% and a high of 6 million job openings, the economy does not need more government stimulus at the present time.
Bridge quality has improved substantially since 1990 (see chart) although roadway congestion has become more acute (second chart). Rail and transit systems appear to be the main areas with observable deterioration.
The difference between state highways (which are in good condition), local roads (which are in fair condition) and transit systems (which are in poor condition) is simple: state road maintenance is paid almost entirely out of user fees (gasoline taxes), local road maintenance is paid for by a combination of taxes and user fees (motor vehicle registrations and parking meters) while transit maintenance is paid for almost entirely out of taxes.
The above indicates that the following policy framework should be followed:
Privatize areas where government is not needed such as airports, air traffic control systems and railways (Amtrak).
Localize decision making as far as possible such as decentralizing responsibility for transportation infrastructure back to the states.
Remove payment barriers for charging users. This could reduce the cost of capital investment required for highway systems by 30%.
Level the playingfield for private sector funding. Currently interest income received for investing in municipal bonds is tax free which is not the case for private debt.
Conclusion. “Rather than imposing further costs on taxpayers, the Trump Administration should prioritize localizing decision making, removing regulatory barriers to private investment, encouraging use of user fees and removing tax exemptions for public investment.”
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.
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.
As the readers of this blog well know, I am very concerned about the fiscal and economic direction our country has been taking in recent years. I voted for Hillary Clinton in the 2016 presidential election because of Donald Trump’s crude and sleazy behavior. However we need basic change in the U.S. and Mr. Trump is clearly a change agent.
As the new Trump administration begins to take shape, here is what I see happening:
Treasury Secretary designee, Steven Mnuchin, says that tax cuts for both upper-income and middle class taxpayers will be offset by “less deductions that pay for it.” Revenue neutral tax rate cuts will increase both consumer and investment spending, without increasing our debt, and will give the economy a huge boost.
Health and Human Services Secretary designee, Rep Tom Price, is an expert on health-care and wants to replace the Affordable Care Act with a new healthcare program which provides more consumer choice at a much lower cost.
The Great Rebuilding. Infrastructure investment is needed but it should be accomplished with a lower corporate tax rate and repatriated profits of multinational corporations to avoid increasing the deficit.
Holdback on excessive fiscal stimulus. With the unemployment rate down to 4.6%, a dollar which has already appreciated 40% since 2011, and tax cuts on the way, inflation and higher interest rates are in the offing. Let’s not overdo it.
Living on borrowed time. As shown in the above chart, interest rates are very, very low and are likely to rise significantly in the near future. When this happens, our massive public debt (on which we pay interest) of 76% of GDP will become very expensive to service. Ouch!
Conclusion. One can see a Trump agenda emerging which has the potential to be very successful if it is coupled with overall spending restraint.
New York Times columnist Paul Krugman is perhaps the most ardent Keynesian economist in the U.S. today. Let’s agree that Mr. Krugman is a very intelligent and articulate fellow. He is a Nobel Prize winner and undoubtedly has made important contributions to economics. But he has the absolutely nutty idea that extreme deficit spending not only doesn’t hurt our economy but can actually be beneficial. His column, “Time To Borrow” in yesterday’s NYT is a perfect example of this dangerous idea. Here is the essence of his thinking:
Our national debt of $19 trillion is just a big scary number. Actually just our public debt alone of $13 trillion (on which we pay interest) is 75% of GDP, the highest since the end of WWII, and is projected (by the CBO) to steadily become much worse.
Federal interest payments are only 1.3% of GDP, low by historical standards. Just lock in repayment with 30-year inflation protected bonds, yielding .64% interest. Okay, suppose we can lock in very low interest payments on our current debt and therefore just borrow away oblivious to total debt for the next 30 years. In 2046 I expect to be gone but my children and grandchildren will still be around. Why should they be stuck with paying off or refinancing our own extravagant debt at likely much higher interest rates?
There are pressing infrastructure problems all over the country which need fixing now. For example, in Florida, green slime infests beaches because of failure to upgrade an 80 year old dike. The answer is to let Florida voters decide if they want to issue bonds for this project and pay them off with state tax revenue. Nebraska, for example, has decided to raise its state gas tax by 6 cents/gallon in order to pay for infrastructure upgrades.
Conclusion. The U.S. is currently in a huge fiscal bind with massive debt and continuing large annual deficits. It is extremely reckless to continue even current deficit spending, let alone increasing it, for anything less than a true national emergency. Infrastructure repair, for example, is an important but routine need which should be paid for out of current tax revenue.
The former CEO of Nucor Steel Company, Dan DiMicco, has written a book, “American Made: why making things will return us to greatness” describing why and how U.S. manufacturing dominance has shrunk in the past 50 years and how it can be restored. Nucor is the largest American steel company and has never laid off an employee in its 42 years in existence, even during the recent recession. Here is Mr. DiMicco’s prescription for a return to industrial greatness:
Build public-private partnerships to restore the manufacturing base. For example, only $60 billion out of the $765 billion stimulus bill in 2009 was devoted to infrastructure spending. As another example, the corporate income tax rate should be significantly lowered.
Level the playing field in international trade. When Germany and Japan built up huge trade surpluses in the 1970s and 1980s, the Reagan Administration responded with the Plaza Accord in 1985 outlawing foreign currency manipulation. Since then China especially has adopted a strongly mercantilist trading policy, subsidizing key industries, exporting as much as possible and importing as little as possible. No president since Reagan has insisted on equitable rule-based trade agreements where the rules are enforced. This would help immensely.
Rebuild the nation’s infrastructure. Mr. DiMicco would be willing to increase deficit spending for such needs as highways, bridges, fiber-optic lines, mobile networks, and urban wastewater systems.
Develop our energy resources. Go all out on natural gas production by fracking. This will lower our carbon footprint and has the potential to make us completely energy independent, thereby greatly reducing our trade deficit.
The skills gap myth. It would help if the U.S. had better career education for high school students unlikely to go to college. But Nucor sponsors cooperative training programs at all of its locations and has no trouble finding workers.
A strong revival of U.S. manufacturing has the potential to create 30 million new jobs and thereby revitalize the American middle class. Mr. DiMicco’s prescription makes a lot of sense.
Thus spoke George Osborne, Great Britain’s Chancellor of the Exchequer, in a recent speech to the Economic Club of New York. “By applying a consistent and long-term economic plan, we can ensure that our best days lie ahead. If we reduce our high debt so we can weather new shocks, and take the difficult decisions to make our economies more productive, we can provide rising living standards for our citizens.” According to Mr. Osborne, any long term economic plan needs to include three elements:
An activist monetary policy to do whatever it takes to sustain sufficient demand in the economy.
A credible commitment to sustainable fiscal policy. Some have argued that fiscal consolidation is incompatible with economic recovery. But recent experience, e.g. sequestration in the U.S. and a balanced budget in the U.K., has shown the reverse.
An ambitious program of supply-side reform. The U.S. has a booming technology sector and the fracking revolution. The U.K. has cut its corporate tax rate to 20%, welcomes disruptive innovation and is pushing ahead on shale gas.
In the U.S. things are moving in the right direction and so the focus needs to be on keeping the momentum going. Monetary stimulus has accomplished much but now a sound exit policy is needed. Sequestration has slowed down the growth of government debt but has not ended it. Further progress will require entitlement reform, especially for Medicare and Medicaid. But first, the Affordable Care Act needs to be improved to do a better job of controlling the overall cost of healthcare. Infrastructure improvement, tax reform and expanding trade are the supply side keys to increasing productivity and shared prosperity.
Activist monetary policy, credible fiscal policy, and ambitious supply side reform: these are the policies which will lead to future progress!
The economy added 321,000 jobs in November, the most in one month since January 2012.
The unemployment rate of 5.8% remains steady and is down from 7% in November 2013.
The average hourly earnings for workers is up by 2.1% from a year earlier.
Economic growth for the third quarter is up 3.9% from the previous quarter.
The deficit for the 2014-2015 fiscal year was “only” 2.8% of GDP and is predicted by the Congressional Budget Office to drop to 2.6% for the current year.
The price of a gallon of gasoline has dropped to $2.71 on average, its lowest level since 2010 and is still dropping.
The New York Times predicts that the “Brighter Economy Raises Odds of Action in Congress.” Jason Furman, Chairman of the White House Council of Economic Advisors, is quoted as saying that “At least there will be less of a philosophical debate on infrastructure, tax reforms and expanding exports. You can have that agenda because the economy is not in free fall.” These three items would make a great agenda for the 114th Congress in the following way:
Infrastructure. The continuing drop in the price of gasoline offers the opportunity to replenish the inadequately funded Highway Trust Fund in a fiscally responsible manner. Congress should raise the federal gasoline tax above its current 18 cents per gallon to a level which is sufficient to fund the entire federal share of highway construction and repair.
Tax reform. Individual and corporate tax reform will give the economy a huge boost. The idea here is to lower tax rates in a revenue neutral way by closing loopholes and deductions.
Expanding Exports. What’s needed here is to give the President fast track negotiating authority so that Congress has to vote any trade agreement up or down without modification. This is the only way to get other countries to make concessions.
Of course there are many other issues which need to be seriously addressed by the new Congress. But relatively quick action on just these three less controversial items would be a great start!
Education tax credits have grown from a $4.5 billion program for 4.7 million taxpayers in 1998 to a $17.4 billion program claimed by over 7 million taxpayers in 2011.
Education tax credits are not well targeted toward low- and middle-income families; almost 50% of the benefits accrue to taxpayers earning more than $75,000, often much more. A much more sensible way to target low income students would be to increase Pell grants.
The overuse of tax credits by the federal government has turned the IRS into a spending agency, with refundable tax credits projected to double to nearly $200 billion in the next five years.
Trading the elimination of education tax credits for lower marginal tax rates would grow the economy by $19 billion per year and create 121,000 new jobs.
The authors go on to say: “It is likely that instead of helping, tax credits may be contributing to the rising cost of college education. Colleges are what economists call price discriminators because they can maximize the price that each student can pay. Because of the Free Application for Federal Student Aid (FAFSA), the college has intimate knowledge of each student’s (or family’s) income and if they are eligible for tax credits, loans, or other financial aid. This information allows the college to simply adjust its financial aid package in order to capture the maximum value of the tax credit. Instead of being a helping hand for students, tax credits have turned into a windfall for universities.”
There are many, many reasons to reform the tax code. The education tax credit is just one very good example!
The federal Highway Trust Fund is almost out of money. It takes in $35 billion per year from the 18.4 cents per gallon federal gas tax, which has not been raised since 1993. Sometime this summer the government will have to cut back on payments to state highway departments unless Congress acts. As the above chart from the Economist shows, the U.S. spends much less of GDP on roads than many other developed nations. Something clearly needs to be done because we need many improvements in infrastructure. But there are better ways and poorer ways to solve this problem. Here are two good ways as described by Thomas Donlan in a recent issue of Barron’s:
A bill to raise the gas tax by 12 cents per gallon over two years has been introduced in the Senate by Bob Corker (R, Tenn.) and Chris Murphy (D, Conn.). Each penny added to the federal gas tax rate will raise $1.3 billion and this would solve the problem.
Repeal the federal gas tax and turn federal highway construction entirely over to the states. Each state could then increase its own gas tax and/or pay for construction with tolls on bridges and roads.
Here are two examples of poor ways to replenish the Highway Trust Fund:
Continue adding to the Fund with borrowed money. $54 billion has been borrowed since 2008 for this purpose. Presumably the Sequester will make it much harder to continue such deficit financing.
Rep John Delaney (D, Mary.) has proposed a tax break for repatriated foreign profits by multinational American companies if part of the money brought back was spent on infrastructure bonds. This would interfere with the urgent need to reform corporate taxes with significantly lower rates offset by lowering deductions, in order to make our corporate tax internationally competitive.
Conclusion: There is a good chance that the Budget Sequester established by Congress in 2011 to control discretionary spending, as well as the widely recognized urgent need for corporate tax reform, will lead to a “good” rather than “bad” solution to the shortfall in the Highway Trust Fund. This is just one specific example of the challenge to sensible budgeting by Congress.
A much broader approach is needed to really shrink the deficit. Stay tuned!
This morning’s Wall Street Journal has a book review by the New York fund manager, Daniel Shuchman, “Thomas Piketty Revives Karl Marx for the 21st Century” of Thomas Piketty’s new book “Capitalism in the Twenty-First Century.” As I recently discussed, Piketty makes the simple observation that income from wealth, i.e. investment income, grows faster than income from wages or GDP. He then provides a large quantity of data showing how this has played out since the end of WWII. He plausibly predicts that the value of private capital as a percentage of national income will continue to grow indefinitely into the future. This much is straightforward. The question is how we should react to a steadily increasing and very large concentration of wealth in the hands of a small percentage of people. Mr. Piketty’s own idea is, for example, to establish an 80% tax rate on incomes starting at “$500,000 or $1,000,000” in order “to put an end to such incomes.” Mr. Shuchman attempts to discredit Mr. Piketty by focusing in on such socialistic views for dealing with the problem rather than discussing the intrinsic merit of Piketty’s basic thesis about the buildup of great wealth in the first place.
My own view is that Mr. Piketty has clearly identified a weakness of capitalism and that it behooves supporters of free markets and private initiative to address this problem in a constructive way, for example, as follows.
We need fundamental broad-based tax reform, i.e. lower tax rates in exchange for closing loop-holes and lowering deductions, in order to boost the economy and create more jobs. As part of a major tax overhaul, we could also establish a relatively small wealth tax, of about 1% or 2%, on assets over $10,000,000, which would raise as much as $200 billion per year. This much money could be used to begin a large scale program of infrastructure renewal as well as leaving a lot left over to make significant payments on reducing our annual deficit.
Such an overall plan would address both income inequality and wealth inequality in a highly visible manner while simultaneously helping our economy.