As the presidential election tightens and the likely margin of victory for either candidate continues to shrink, it becomes ever more apparent that we need a bipartisan approach to solving our most basic problems. My last post discusses the need for fundamental tax reform to get our economy growing faster to create more and better paying jobs. Today I remind my readers of the need for better fiscal policies as well to address our massive and steadily deteriorating debt problem.
As the American Enterprise Institute, among many other think tanks, makes abundantly clear, we are spending more and more of our federal budget on entitlements as opposed to all of the many other federal responsibilities which are lumped together as discretionary spending. In other words, the only way to fix our deficit and debt problems is to achieve better control over entitlement spending.
AEI has some excellent ideas on how to do this:
Social Security should move towards providing a universal flat benefit, set at the federal poverty level, for all U.S. residents aged 65 and older. Social Security would then become a guarantee against poverty in old age rather than a scheme for partially replacing pre-retirement earnings for middle and higher earning households.
Health Care. The Affordable Care Act should be replaced with a less regulated system (i.e. no mandates). The federal tax preference on employer plans could be limited to the cost of catastrophic (high deductible) insurance plus a contribution to health savings accounts. Households without employer coverage would receive a comparable tax credit.
Medicare would be converted into a premium support system with a fixed level of support comparable to that provided by employers.
Medicaid would be converted into a block grant program for the states based on the fixed, per capita costs for enrolled populations.
Other Safety-Net Programs should emphasize work as the key to improved economic prospects plus greater state control over resources in order to encourage innovation.
Conclusion. It should be emphasized as strongly as possible that the purpose of entitlement reform is to preserve and strengthen entitlements, not to weaken ordestroy them. Without such action we are headed for a much worse financial crisis than the one we had in 2008-2009 which will put all government social programs at risk.
There has been a lot of public attention given to these topics recently. Our stagnant economy since the end of the recession almost five years ago has meant high levels of unemployment and underemployment which naturally causes widespread discontent. The 50th anniversary of President Johnson declaring War on Poverty provides an opportunity to look back and evaluate its success.
A very good summary of where we stand on poverty was given two years ago by Robert Rector and Rachel Sheffield of the Heritage Foundation: “Understanding Poverty in the United States: Surprising Facts about America’s Poor”. The authors used 2010 census data for their study. Poverty was defined to be a cash income of $22,314 or less for a family of four in 2010 (which increased to $23,550 in 2013). They pointed out, for example, that “96% of poor parents stated that their children were never hungry at any time during the year because they could not afford food.” The chart below shows that poor households, in general, have many of the common amenities. In other words, the close to $1 trillion spent per year ($871 billion in 2010) by federal and state governments on means tested assistance for the poor has largely eliminated destitute poverty in the U.S. Further progress will require successfully addressing both the collapse of marriage and the lack of parental work in low-income communities. These very difficult problems can only be addressed with a long term educational effort to turn poor children into productive citizens.
Conclusion: the War on Poverty has had reasonable success at huge cost and further gains will be more expensive and more drawn out over time. We’ve already started on this second phase by emphasizing early childhood education and so the focus now should be to implement this new direction.
Next step: it’s now time to direct our serious attention to the issues of inequality and mobility. That will be the subject of my next post!
In the latest issue of Barron’s, Frederick Rowe, the managing partner of Greenbrier Partners Capital Management, asks in “More Than a Sugar High?” , “Can you imagine a country that is managed in an economically rational manner, creating the wealth that’s necessary to take proper care of the citizens who get left behind? … What if our economic recovery is more than a sugar high? What if there is more here than insanely stimulative monetary policy from the Federal Reserve? What if the U.S. has already begun to steer an economic course to a period of unprecedented and genuine prosperity, achievement, and problem solving?”
Here are eight factors which Mr. Rowe gives to point us in the right direction:
North American Energy Independence (already on the horizon).
Sensible Immigration Reform: encouraging our most enterprising and hard-working people to become citizens rather than chasing them away.
Repatriation of Corporate Income: if a company domiciled in the U.S. makes money in Argentina and wants to invest it in the U.S. we double-tax the daylights out of it. It would be hard to imagine a more counterproductive tax policy.
Changing Directors and Their Thinking: the once unthinkable mindset of corporate directors acting on behalf of long-term owners (rather than the CEOs with whom they play golf) is actually gaining traction.
Lowering Corporate Taxes: the tax-writing committees in Congress are working on this.
Increasing Technological Leadership: the most dynamic technology companies in the world are domiciled in the U.S. Technology, in the short run, displaces workers. But eventually workers catch up because new technology creates new kinds of jobs that were never imagined before.
Americanization of the World: more than three billion people around the world will soon be able to afford to live much more like the 300 million Americans do. So companies which make it big here have an automatic global opportunity.
Obamacare: Even this bureaucratic catastrophe provides a large opportunity for economic opportunity. Think of Jimmy Carter’s failures which led to Ronald Reagan’s successes.
“Let your imagination run and consider all the things that can be accomplished by an energy-independent, cash-generating, cash-repatriating country that is a hotbed of technological innovation.”
I can’t possibly say it any better than this!
Yesterday’s New York Times addresses this issue with an article “Ohio Governor Defies G.O.P. With Defense of Social Safety Net”. It describes how Republican Governor John Kasich has maneuvered to expand Medicaid coverage in Ohio to 275,000 low income Ohioans under the new healthcare law, over the objections of his own Republican dominated state legislature.
Mr. Kasich is a former congressional deficit hawk and there is little doubt about his fiscal conservatism. He recently balanced his state budget by cutting revenues to local government by $720 million. But he has also expanded state aid for the mentally ill and supported efforts to raise local taxes for improving education. He says “for those who live in the shadows of life, for those who are the least among us, I will not accept the fact that the most vulnerable in our state should be ignored.”
Especially after the disastrous debt ceiling debate, with Tea Party Republicans willing to default on our national debt in order to defund Obama Care, it is critical for fiscal conservatives to publicly demonstrate that they are not opposed to helping the poor in a reasonable manner, as long as it is cost effective.
To be in favor of controlling entitlement spending is not the same thing as wanting to abolish entitlement programs. In fact, it is just the opposite. We must control their costs so that the government will have the means to continue to support them. It is just plain ordinary common sense. If our national debt continues to grow unchecked, we risk not only entitlement programs but our entire way of life.
Take Medicaid as a concrete example. Right now the federal government pays a percentage of the costs incurred by state governments in running the program. The more a state spends for Medicaid, the greater the reimbursement from the federal government. This increases spending for both the states and the federal government. A more cost effective approach is to give each state a block grant from the federal government and enough leeway to operate its own program as efficiently as it can. Exactly this approach is being used in Rhode Island and is working very well at a much lower overall cost.
Being a fiscal conservative is not the same thing as being mean spirited! The future of our country depends on getting this crucial message out far and wide!