The United States faces many challenging problems but the biggest one of all is our national debt, right now 77% of GDP, the largest since right after WWII, and predicted by the Congressional Budget Office to keep getting steadily worse without major changes in current policy.
The only practical way to reduce the debt is to start shrinking our annual deficits, $680 billion for the current 2017, down to a much lower level, ideally close to zero, over a limited time period, perhaps ten years or so. This urgent need will, of course, be very difficult to accomplish.
Military spending. The military analyst, Mark Helprin, makes a cogent argument that the most effective way to defuse the North Korean nuclear threat is for President Trump to ask Congress “for an emergency increase in funding to correct the longstanding degradation of American military power.” This would, among other things, provide for “a vigorous acceleration of every aspect of ballistic-missile defense.”
Omaha Rapid Bus Transit. Omaha NE (where I live) is spending $15 million in local funds for a $30 million bus system upgrade, subsidized by the Federal Transit Authority, which has an annual budget of $8.6 billion. The new ORBT will have sleek 60 foot-long buses as well as 27 individual modern bus stop shelters at a cost of $260,000 each. The system will be operational in 2018 and Mayor Jean Stothert says, “I’m looking forward to being one of the first riders.”
Conclusion. Who can argue with upgrading ballistic-missile defense at a time when we are threatened by a madman in North Korea? And, it is nice for Omaha to have a sleek modern rapid transit bus system on Dodge Street but should it be 50% subsidized by the federal government at a time when the U.S. is drowning in debt? There will always be enormous pressure on Congress to increase funding for popular projects.
Who is going to stand up and say no?
The annual shareholders meeting of Berkshire Hathaway Inc. was held this weekend in Omaha. More than 40,000 people attended. Yesterday CEO Warren Buffett and vice chairman Charles Munger held a five and one-half hour question and answer session for the attendees.
Says Mr. Buffett as reported by the Omaha World Herald:
“We’ve got a big appetite for wind and solar projects.” BH Energy “borrows at taxable rates and Nebraska in terms of wind is not that much different than Iowa. We’re selling electricity in Iowa at lower rates than exist in Nebraska (with public power).”
Should BH keep working with Brazilian investors 3G Capital, known for slashing jobs at companies it invests in? Replied Buffett, “The gains in this world have come from gains in productivity. … This is why we live so well. … Government can put in place policies and programs that help workers left behind by economic shifts.”
“Trade, export and import, massive trade, should be and is enormously beneficial to the U.S. and the world.”
Medical costs are the “tapeworm of American economic growth. … Corporate taxes aren’t crippling but medical costs continue to rise. … The problem seems to transcend political party.”
Conclusion. Just these few remarks, among many others from the meeting, touch on several broad economic themes which I discuss on this blog. Private enterprise is a powerful and efficient method of generating wealth for humanity. Government should intervene to help those hurt by progress. Renewable energy is profitable and here to stay. Healthcare costs have a significant effect on business growth and need to be controlled. Neither political party has a monopoly on the truth.
I want to be as clear as possible that I have not yet endorsed either Hillary Clinton or Donald Trump for President and I am not doing so now. Each of them has strengths and weaknesses which I am still weighing:
Mrs. Clinton has extensive experience and a steady temperament but her policy prescriptions are unlikely to lead to the faster economic growth needed to boost prosperity.
Mr. Trump lacks government experience and has a volatile temperament. However many of his policy proposals make very good sense.
Pre-debate expectations were very low for Mr. Trump, based on his assumed lack of familiarity with many important issues. Nevertheless he showed that he does have a solid understanding of both national and international affairs. On the three general debate topics:
Achieving Prosperity. Mr. Trump was very clear in stating what needs to be done to create more jobs and better paying jobs. He advocates individual tax reform to stimulate more business investment as well as corporate tax reform to encourage multinational companies to bring their foreign earnings back home for reinvestment.
America’s Direction. Mr. Trump made several references to our massive national debt of $20 trillion even though he didn’t say what he’ll do about it. He also stated very strongly that he is opposed to the Trans-Pacific Partnership and the North American Free Trade Agreement as well. Let’s hope that Mr. Trump’s bluster is just a ploy to improve his bargaining position with other countries. Otherwise he could set off a major new recession.
Securing America. Mr. Trump is very clear on the need to destroy ISIS and to do so as quickly as possible. He believes that our 27 NATO allies should be contributing more towards our mutual defense. He also supports “stop and frisk” police policy as the best way to cut down on crime and violence in our inner cities.
Conclusion. Mr. Trump’s clearly stated views on these major national issues in last night’s debate were very impressive. By establishing so well his qualifications to be president, he won the debate.
As I indicated in my last post, ”Entitlement Spending and the National Debt,” our national debt is much too high and steadily getting worse. Furthermore, it is entitlement spending, especially Medicare, which is the fundamental driver of our increasing debt. If we don’t solve this problem relatively soon, we will have another financial crisis on our hands, much worse than the last one in 2008. When interest rates go up, as they will sooner or later, then interest payments on our accumulated debt will rise precipitously and threaten to bankrupt the nation. The only effective way to control Medicare costs, however, is to control the overall cost of healthcare in the U.S., i.e. for private healthcare. The above chart shows the nature of this problem. Right now we are spending 17.4% of GDP on healthcare, public and private, and this is predicted to reach 19.6% of GDP by 2024. This is almost twice as much as for any other developed country. The Omaha World Herald had an article on Sunday, “Bending the Curve,” purporting to show that cost increases for total national healthcare spending are dropping (see just above). The problem is that these supposedly low price increases in recent years are still twice the rate of inflation which is now averaging under 2% per year. This means that even 4% – 5% price increases per year are much too high and need to be curtailed even further. The fundamental reason why U.S. healthcare is so expensive is that Americans do not have enough “skin in the game.” The above chart shows that our direct out-of-pocket costs for healthcare have been steadily dropping for the last fifty years as the role of health insurance has expanded. This means that we simply don’t have enough personal incentive to hold down healthcare spending on our own. Conclusion: We have to control entitlement spending, especially for Medicare, to get our national debt under control. But this can only be done by limiting the steep spending increases in overall healthcare, public and private. How will we be able to do this? Be patient, we’re getting there!
I have no antagonism for Barack Obama. He was elected because of the unpopularity of the Iraq War and George Bush who started it. He inherited the Financial Crisis and pulled us out of it without another depression. He has put us on the road to universal healthcare even though the structure of the Affordable Care Act does little to control costs. But overall, the negatives of his presidency outweigh the positives. Consider the situation we are currently in:
Stagnant Economy. The annual rate of growth of GDP since the end of the Great Recession in June 2009 has been an anemic 2% compared to our historical growth rate of 3% since the end of WWII. Although the official unemployment rate is down to a respectable 5%, there are millions of unemployed and underemployed people who have stopped looking for work. Obama and the Democrats in Congress have little interest in the tax reform and deregulatory measures which would boost economic growth.
Massive Debt. Our public debt (on which we pay interest) has doubled to over $13 trillion on Obama’s watch. As the Federal Reserve begins to raise interest rates to ward off inflation, interest payments on this debt will increase enormously. It is absolutely imperative to begin to substantially shrink our annual budget deficits. The Democratic Party, under his leadership, has expressed no willingness to do this.
Chaotic Middle East. The rise of ISIS in Syria, Iraq and North Africa, and the resulting refugee crisis in Europe is the result of weak U.S. leadership in the Middle East. Peace and stability depends on a strong U.S. presence in all trouble spots around the world. We neglect this responsibility at our peril.
Hyper-partisan Political Atmosphere. Stalemate in addressing these and other serious problems has led to the rise of extremist presidential candidates like Bernie Sanders and Donald Trump. Moderate candidates with successful experience in elected office are unable to gain political traction.
Our country is in a big mess. We are being guided by ideology rather than common sense. I am optimistic by nature. But it’s awfully easy to be pessimistic about our future.
In my last post I presented the argument that voters are often more reasonable than the populist leaders who are trying to appeal to them. They would rather hear something more optimistic than rage against a dangerous world. But there is a difference of opinion on how to reach these voters:
Leading Democratic presidential candidate Hillary Clinton endorses the Buffett Rule which calls for millionaires to pay a minimum tax of 30% on their income. Says Clinton, “I want to go even further because Warren is right. I want to be the president for the struggling, for the striving and the successful.”
All of the Republican presidential candidates, including Donald Trump, have tax reform plans which will grow the economy but none of which are revenue neutral. In other words, they will all add to annual deficits and therefore make our debt problem much worse than it already is.
The nonpartisan Tax Foundation has issued a new report, “Options for Broadening the U.S. Tax Base,” which proposes capping itemized deductions at $25,000 per individual combined with
i) cutting the corporate tax rate to 27%
ii) cutting the top three ordinary income brackets by 5%, and
iii) implementing a top capital gains tax rate of 20%.
Such a plan would be revenue neutral and would lead to a long term GDP gain of 2.7%, a long term wage gain of 2.2% and a ten year dynamic revenue gain of $759 billion.
The Clinton plan would bring in up to $50 billion per year in new tax revenue but would do little to boost the economy. The Republican presidential tax plans are fiscally irresponsible. The Tax Foundation plan would boost the economy and reduce deficits rather than increase them. Other specific reforms would boost the economy even more.
In other words there are clear cut ways to create more jobs and raise wages. This is a message which should appeal to the angry and disaffected voters who are attracted to Donald Trump.
In his usual provocative manner, Paul Krugman reminded us yesterday that, according to a recent study by Alan Blinder and Mark Watson, ever since President Truman the economy has grown faster under Democratic presidents than under Republican presidents. There are a lot of different explanations for this, not necessarily demonstrating better economic policies by Democratic presidents. Nevertheless, it is a noteworthy finding which fiscally conservative, fix-the-economy types, need to be aware of. Among other things, Republican presidential candidates must become more credible about their economic policies than they have been so far. They have all proposed big cuts in tax rates to stimulate the economy. But their plans lose trillions of dollars in tax revenue. At a time of huge deficits and a rapidly growing national debt this is simply unacceptable.
In today’s Omaha World Herald, the economics journalist, Robert Samuelson, reports on a new Brookings Institute study about the effect of raising the top individual tax rate from 39.6% to 50%. Such a tax hike would raise as much as $100 billion per year.
However, if used to lower deficit spending, it would cover less than ¼ of current deficit spending ($439 billion in 2015, for example).
If used to reduce income inequality for the poorest 1/5 of Americans, it would give such households an average of $2,650, and the overall effect on income inequality would be very modest.
The point is that neither costly tax cuts to boost economic growth nor a sizable tax increase on the wealthiest Americans represents a viable program to straighten out our economic problems. What we need to grow the economy is:
Revenue neutral tax reform, lowering rates across the board, paid for by closing loopholes and shrinking deductions.
Lightening the regulatory burden at least on small and mid-size businesses in order to speed up business growth and entrepreneurship.
Trade expansion and immigration reform to increase productivity.
Fiscal conservatives are badly needed to implement such policies effectively but neither party can get the job done alone. It will take both parties working together to make progress.
An article in the Friday, August 14 edition of the Omaha World Herald, “Why are the BRT stations so expensive? Officials explain the $260,000 price tag,“ describes a new $30 million bus rapid transit plan for Dodge Street with 27 individual sleek, modern bus stop shelters along the route at a cost of $260,000 each. Half of the new $30 million plan will be paid for by the city of Omaha and half by the Federal Transit Authority which has an annual budget of $8.6 billion. The issue is not whether Omaha should spend $15 million in local funds to achieve a $30 million bus system upgrade. We can expect city officials to make a responsible decision on this matter. The real issue is why the FTA should have annual budget of $8.6 billion to begin with when it is paying for, and therefore encouraging, extravagantly designed bus transit systems all over the country. The U.S. deficit for the 2015-2016 budget year, ending on September 30, is predicted to be about $450 billion dollars. This adds to the approximately $13 trillion public debt (on which we pay interest) which, at 74% of GDP, is the highest it has been since the end of WWII (see the above chart from the Congressional Budget Office).
It is the responsibility of Congress and the President to figure out how to get the budget under better control. All aspects of federal spending can and should be tightened up, including entitlements (Social Security, Medicare and Medicaid) and discretionary spending (everything else).
The Federal Transit Administration is wasting money on unnecessarily extravagant bus transit systems. Such fiscal irresponsibility means that its budget should be cut significantly. Many other similar examples exist in the federal government. We need people in Congress who can identify these fiscal boondoggles and effectively agitate for needed cutbacks.
The unemployment rate in Nebraska is now down to 2.9% and even in Omaha, a relatively large metropolitan area of 850,000, it is only 3.2%. As reported by the Omaha World Herald today, such a low unemployment rate creates big problems for employers at all levels. For example:
In fast foods, beginning salaries are up to $10 or more per hour, well above Nebraska’s new minimum wage of $8 per hour, and raises for responsible employees are frequent. Manager’s salaries are increasing rapidly. Benefits are being expanded into such areas as tuition reimbursement.
For the predominantly minority residential area of North Omaha, with a traditional unemployment rate of up to 20%, local manufacturers are beginning to provide transportation vans to pick up and drop off workers.
The Omaha Chamber of Commerce is running an ad campaign in Seattle to appeal to soon-to-be-laid-off Microsoft workers, because there are lots of vacant tech positions in Omaha.
Both the Greater Omaha Chamber of Commerce and the Lincoln Chamber of Commerce have endorsed LB 586 in the Nebraska Legislature to ban discrimination in the workplace based on sexual orientation and gender identity. The purpose, as expressed by both chambers of commerce, is to create a more attractive work environment in order to attract more workers from other states. The neighboring states of Iowa and Colorado have passed such laws.
What more can be done? The welcoming labor market should provide a bigger incentive for both high school and college students to finish their studies and graduate. Jobs will be waiting for them! The labor shortage should also help create more interest in immigration reform. This would insure that Nebraska has an adequate number of legal guest workers to meet the needs of the agricultural and meatpacking industries.