Reviving the economy after the Great Recession. This was done but the recovery has been unnecessarily slow with annual growth averaging just 2% of GDP ever since June 2009. In fact, stagnant middle-class and especially blue-collar incomes are the reason Donald Trump eked out a victory over Hillary Clinton.
A giant step towards national healthcare. Even if the Affordable Care Act is repealed, its replacement will be much more universal than before. Unfortunately, however, the ACA increases access but does nothing to control the cost of healthcare (now 18% of GDP) which continues its steady rise. This is what has to change.
A global pact to combat climate change. Global warming is real but our response should be more circumspect. China has only pledged to reduce carbon emissions after 2030. India has 300 million people off the electric grid. It also has an abundant supply of coal. Heroic efforts by the developed world alone will have little effect on worldwide C02 levels.
A rash of new financial and environmental regulations. Both Dodd-Frank and new EPA regulations have contributed significantly to the economic slowdown which is why they are likely to be modified by the Trump Administration and Congress.
The Iran nuclear deal. The problem here is what will happen when the 10 – 15 year deal expires. Iran then will have a green light to develop nuclear weapons unless China and Russia agree to new sanctions which is unlikely.
American retreat from superpower status. Obama deposed a dictator in Libya but walked away from the aftermath. His premature decision to leave Iraq allowed ISIS to spring up. He let the civil war in Syria run out of control. A “reset” with Russia did nothing to prevent Putin from invading Ukraine and annexing Crimea.
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.
The Supreme Court will soon render an opinion in King v. Burwell challenging the implementation of the Affordable Care Act. If the Court agrees with the plaintiffs, then anyone receiving health insurance through one of the federal exchanges operating in 33 states is not eligible to receive a subsidy. Several Committees in the House of Representatives are proposing to take such an opportunity to make improvements to the ACA. In addition, the Congressional Budget Office has just released a report on the “Budgetary and Economic Effects of Repealing the Affordable Care Act,” indicating that repeal of the ACA would add $137 to the deficit over 10 years. This is because the loss of ACA imposed new tax revenues and spending cuts to Medicare would exceed the amount of money spent to expand insurance coverage.
The economist John Goodman has an excellent new book, “A Better Choice: Healthcare Solutions for America,” describing several basic changes which would greatly improve the ACA. In summary they are:
Replace all of the ACA mandates and tax subsidies with a universal (and refundable) tax credit which is the same for everyone. This is the fairest way to subsidize healthcare for all and it also removes the huge market distortion provided by employer provided health insurance which is tax exempt. The tax credit would be about $2500 per individual and $8000 for a family of four, the approximate cost of catastrophic health insurance and also the average cost of Medicaid.
Replace all of the different types of medical savings accounts with a Roth Health Savings Account (after-tax deposits and tax-free withdrawals).
Allow Medicaid to compete with private insurance, with everyone having the right to buy in or get out.
Keep the ACA exchanges which would be required to provide change-of-health status insurance for the protection of the chronically ill.
Changes such as these would dramatically lower the cost of American healthcare by making all of us directly responsible for the cost of our own healthcare. They would also virtually eliminate the perverse market effects of the ACA which encourage companies to cut back on numbers and working hours of employees. This in turn would speed up the growth of our stagnant economy!
As I like to remind readers, I am a non-ideological fiscal conservative. I am not hard core anything. I just want to find practical, workable solutions for difficult and complicated problems. There is basically only one exception to my generally moderate outlook. I detest huge amounts of deficit spending except for unusual circumstances. Most of the time we should be willing to either raise taxes and/or cut spending to do what needs to be done and to live within our means.
This is why the current efforts by the Budget Committees of both the House and the Senate to devise a plan to balance the budget, i.e. eliminate deficit spending, over a ten year period is so exciting to me.
An analysis in today’s New York Times suggests that Congress should be content to just extend the so-called Ryan-Murray Budget from 2014-2015. “Ryan-Murray didn’t decisively move the needle one way or the other, which is why it was able to attract bipartisan support. Rather it preserved the status quo. In a world of divided government and polarized politics, keeping the government running without a lot of brinkmanship and high drama may be the best we can hope for.” As I pointed out in my last post, current policy will raise government spending by 5.1% annually over the next ten years. The President wants to increase spending by an additional $1 trillion over this time period. The Republican budgets, which lead to balance in ten years, still allow spending to increase by 3.3% annually. The difference between the two plans is illustrated in the above chart from last Sunday’s Omaha World Herald.
Congress is finally in a position this year to start digging us out of the deep fiscal hole we have fallen into. Let’s hope that too much “bipartisan” status quo thinking doesn’t get in the way of progress!
An article in yesterday’s Wall Street Journal, “What Clever Robots Mean for Jobs,” illustrates the stark fact that “automation is commandeering much middle-class work such as clerk and bookkeeper, while creating jobs at the high- and low-end of the market. This is one reason the labor market has polarized and wages have stagnated over the past 15 years.” The above chart shows the divergence between productivity growth and payrolls beginning in the year 2000. It is a vivid portrayal of the “hollowing out” of the middle class which is causing so much grief.
Now let’s turn to a column in today’s New York Times, “What Is Middle-Class Economics,” by the journalist, Josh Barro. The term, of course, refers to the policies by which President Obama hopes to appeal to the millions of middle-class families with stagnant incomes. According to Mr. Barro, the President’s policy proposals have three facets:
Tax and regulatory provisions such as tax credits for childcare, college tuition and a second earner in households where both parents work. Employers would be required to provide paid sick leave and the minimum wage would be raised.
Make workers more productive by expanding access to community college.
Increase overall economic growth with increased infrastructure spending and new trade agreements.
The problem, as Mr. Barro points out, is that such policies would have only a small effect on the taxes of a middle-income family, amounting to a cut of no more than $150 per year on average. This is much less than the average family will save from falling gasoline prices.
On the other hand, it is generally understood that stagnant middle-class wages will not rise very much until the labor market becomes tighter as a result of falling unemployment. Mr. Barro suggests that the government can help this process along in two ways:
By the Federal Reserve holding down interest rates, or at least letting them increase only very slowly.
With policies to make it easier to work less. The Affordable Care Act does this by decoupling health insurance from full time work. The surge in disability insurance recipients takes people out of the labor market. The rapid retirement of baby-boomers does the same thing.
Unfortunately there are many negative effects from both the Federal Reserve’s easy money policy as well as a shrinking labor participation rate. I will return to this issue soon!
The 2015 Economic Report of the President has just been released. It shows that the slow growth of productivity is playing a bigger role in squeezing middle class incomes than the rise of economic inequality. The above chart makes some dire predictions:
The labor force, which has averaged 1.5% growth since 1950, is likely to grow just .5% a year in coming decades, because any increase in new workers is likely to be swamped out by baby-boomer retirements.
Productivity has grown just 1.3% a year since the end of the last expansion in 2007.
These two figures together predict an anemic, less than 2% growth, economy going forward.
The President proposes several policies to address this slow growth:
Immigration Reform would provide more highly skilled workers for the economy as well as a more efficient guest worker system for low-income labor.
Increased Foreign Trade would expand our export economy.
An Expanded Workforce could be achieved with a higher Earned Income Tax Credit to boost dual-income households.
An increase of Infrastructure spending of 1% of GDP is estimated to boost output by 2.8% after 10 years.
Corporate Tax Reform would encourage U.S. multinationals to bring their foreign profits home for reinvestment.
These are good ideas but much more could be done as well:
Individual Income Tax Reform, exchanging lower tax rates for all by closing loopholes and deductions would boost spending by middle- and lower-income tax payers.
Reforming Social Security and Medicare by setting higher retirement ages would encourage longer work lives.
Reforming the Affordable Care Act by removing the employer mandate would boost productivity by making the labor market more efficient.
Faster economic growth will not only reduce unemployment, it will also make it much easier to shrink the deficit as more tax revenue is raised. This should be one of the very highest priorities for our elected representatives in Washington!
Prospects for future economic growth are decidedly grim. The Congressional Budget Office has just reported that after a brief improvement for a couple of years, annual GDP growth will likely hover around 2.2% for the remainder of the ten year window 2015 – 2025. This means, in turn, that the unemployment rate will also not likely fall much below its current level of 5.7% for the same ten year period. A new report from the McKinsey Global Institute makes the even gloomier prediction that average U.S. GDP growth rate for the next 50 years will be only 1.9% per year, given current trends and policies. A summary of this report is provided by the Brookings Institution social economist, William Galston.
On the other hand, according to New York Times columnist, Nate Cohn, the Democratic Party may be adopting a new policy direction, “The Parent Agenda, The Democrats’ New Focus.” By this new focus he means:
Paid family leave
An expanded earned-income tax credit and child tax credit
Free community college
Free four year college in time
Mr. Cohn points out that both President Obama as well as Hillary Clinton have endorsed such ideas. Initiatives such as these are unlikely to go far in the current Republican Congress but they may still sound very attractive to the many hard-pressed middle class families with stagnant incomes.
The problem is that to emphasize a “family” political agenda like this is in effect to accept the conventional wisdom that faster economic growth is unattainable. This is a defeatist attitude which is very harmful to the 20 million Americans who are either unemployed or under-employed. Here, briefly, is what could be done to boost economic growth in the short term:
Implement broad-based tax reform with lower tax rates for all, paid for by closing loopholes and limiting deductions.
Reduce regulatory burdens on business by, for example, streamlining (not repealing!) the Affordable Care Act and the Dodd-Frank Financial Reform Act.
Expand legal immigration with additional high-skill visas as well as an adequate guest worker program.
Expand international trade with new trade agreements.
These are all political footballs, of course, but also policies with much potential to speed up economic growth. Either we take initiatives such as these or we consign our country to a future of relative economic stagnation with slow wage growth, high unemployment and increasing income inequality.
As I like to remind readers, I am a fiscal conservative and a social moderate. I started writing this blog in November 2012, after running unsuccessfully in a Republican congressional primary in May of that year. I am appalled by our reckless fiscal policies in recent years. We simply have to get federal spending in much better alignment with tax revenue and do this in a relatively short period of time.
Both political parties are responsible for our current predicament. Nevertheless, we need to have the best factual information available to help us get back on track. Today I compare the Bush deficits with the Obama deficits. The most objective way to do this, in my opinion, is to divide the transition budget years, 2001 and 2009, between the incoming and outgoing presidents. In other words, October, November and December of the year 2000 are assigned to President Clinton and the last nine months of the 2001 budget year, i.e. January 2001 – September 2001, are assigned to President Bush. Likewise for the 2009 budget year, when Bush was leaving office and President Obama was coming in. A good source for such detailed budget information is the website of David Manuel, “an online repository of financial and political information that is often searched for but is generally hard to find.”
Here is what I’ve come up with:
2001 budget year (last 9 months) $129.6 (billion) surplus
2002 budget year $157.8 (billion) deficit
2003 budget year $377.6 (billion) deficit
2004 budget year $413 (billion) deficit
2005 budget year $318 (billion) deficit
2006 budget year $248 (billion) deficit
2007 budget year $161 (billion) deficit
2008 budget year $459 (billion) deficit
2009 budget year (first 3 months) $332.5 (billion) deficit
$2,337.3 (billion) deficit TOTAL
2009 budget year (last 9 months) $1080.5 (billion) deficit
2010 budget year $1294 (billion) deficit
2011 budget year $1299 (billion) deficit
2012 budget year $1100 (billion) deficit
2013 budget year $ 683 (billion) deficit
2014 budget year $ 483 (billion) deficit
2015 budget year (CBO estimate) $ 468 (billion) deficit
2016 budget year (CBO estimate) $ 467 (billion) deficit
These totals represent, of course, the amounts that were added (Bush) or will be added (Obama) to the national debt during their terms of office. George Bush made little, if any, effort to control deficit spending. But the Obama debt is three times as bad as the Bush debt. Getting the debt under control is by far our biggest and most urgent national problem. By failing to take our debt seriously, both Bush and Obama have been huge failures as president!
President Obama has proposed a $3.99 trillion budget for next year, a $340 billion increase from the current 2015 budget year. As shown in the charts below, it projects deficits of about 2.6% over the next ten years equal to its (optimistic in comparison to the CBO) growth projections for GDP. This means that the debt would stabilize at about 73% of GDP. And, of course, achieving his predicted stabilization of debt will require big tax increases over this ten year period. Here are the major weaknesses in the budget:
Sequestration. The President declares that “I’m not going to accept a budget that locks in sequestration going forward.” Everyone deplores the mindlessness of sequestration but the only responsible alternative is to make targeted cuts throughout the budget. The President makes no attempt to do this. And he wants to add spending for various new education and research initiatives, as well as an expanded Earned Income Tax Credit for low-income workers.
Infrastructure. Spending over the next six years would increase by $238 billion to be raised from a 14% repatriation tax on the $2 trillion in foreign earnings held overseas by American multinational corporations. The problem is that any repatriation tax should be tied in with overall corporate and business tax reform, exchanging lower tax rates in return for closing loopholes and deductions, in order to make U.S. business taxes competitive with those of other countries. Fundamental tax reform is the key to getting our economy growing faster.
Entitlements. The President’s budget does not even mention the biggest threat to long-term fiscal sustainability, namely the rapidly increasing spending for Social Security, Medicare and Medicaid. It will be very difficult to make progress on this critical issue without presidential leadership.
Stabilization of the Debt. The President’s budget, with quite optimistic revenue and growth projections, stabilizes the debt over ten years. But this is not nearly good enough. To be satisfied with a public debt of 73% of GDP indefinitely into the future is simply too risky. What’s going to happen when we have another financial crisis, as we surely will? How are we going to cope with our growing rivalry with China with very little budget flexibility? And one can imagine any number of other possible emergencies which might occur. Putting the debt on a clear downward trajectory is the only prudent thing to do!
The projected cost of $6 billion per year is too high and the program is highly duplicative with other scholarship programs such as Pell grants.
Education is primarily a state and local responsibility, not federal.
The graduation rate at community colleges is only 21%, much lower than at other types of educational institutions.
There is a whole new marketplace of non-degree credentials such as competency-based programs and micro-certifications which often provide greater variety, quality and monetary value than community college programs.
These criticisms are largely valid and should largely be incorporated into the guidelines of the President’s proposal as they are drawn up and submitted to Congress. But they miss the larger point. Today, about 30% of young people in the U.S. graduate from a four year college. Tuition and fees at public college averages $9,000 per year while the comparable cost at private colleges is $31,000. Loan debt for college graduates averages $27,000 per year, and is much higher for many. And, according to the above chart from the New York Times, educational attainment in the U.S. lags behind the rest of the developed world.
Today’s increasingly high-tech and interconnected world puts a huge premium on educational attainment and America’s system of higher education is not meeting the challenge. It is too expensive and not educating enough people, especially minorities and those with low-incomes.
The best way to address this problem in a cost-efficient manner, which is a necessity in today’s fiscal climate, is to expand opportunities at our 1100 community colleges. Community colleges are not only incredibly low cost operations, they accept all students and start them out at whatever academic level is necessary. They provide the ideal venue to lift up large numbers of average and previously-failed students and turn them into productive members of society. Boosting community college enrollments will, in turn, give our economy a big boost.
This is the real reason why President Obama’s free tuition plan should be taken seriously. It will shine a strong light on an educational sector whose potential is greatly under-appreciated by many Americans.