Category Archives: Uncategorized

What is the Biggest Drag on the Economy?

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In today’s Wall Street Journal columnist David Wessel has an article entitled “Biggest Drag on Economy?  Washington”.   He quotes Senator Dick Durbin (Democrat, Illinois) as saying “We have the Fed hitting the accelerator as hard as it can, and we have Congress doing the opposite.”  He is referring to across the board spending cuts (the Sequester) and raising of the top tax rates.

What we should be doing, according to Senator Durbin, Mr. Wessel and the experts he cites, is reforming entitlements, especially for health care, rather than trimming core functions of government across the board.  Likewise we should be implementing pro-growth tax reform , by lowering tax rates and shrinking deductions, rather than raising tax rates.

Who is holding up the big budget deal which Senator Durbin says he wants?  He needs to look in the mirror!  It is the Democrats who are dragging their feet on entitlement reform as well as replacing tax deductions with lower tax rates.  The Democrats control two thirds of the executive and legislative branches of government.  If they continue to stall on implementing the economic and fiscal policies which we so badly need to get our country moving again, they will eventually pay a severe price at the polls.

Why $16 Trillion Only Hints at the True U.S. Debt

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In an Op Ed article last fall in the Wall Street Journal two former Congressmen, Chris Cox and Bill Archer, point out that the total US government debt, now over $16 trillion, is only a fraction of the total unfunded liabilities of the government, which now exceed $87 trillion.  The unfunded liabilities represent future expected payments for Social Security, Medicare benefits for currently employed workers as well as current retirees and also the future retirement benefits of current federal employees and retirees.

If this enormous sum of already obligated future payouts is not bad enough, even scarier is the rate of growth of these unfunded liabilities.  In calendar year 2011, the accrued expense was $7 trillion, double the entire current revenue of the federal government of about $3.5 trillion.  In other words this awful problem is getting much worse every year.

The House Republican majority is trying to address our almost incomprehensibly bad debt problem.  Will they be able to generate enough public support to force the Senate and the President to take the problem seriously?  Right now the odds do not look very good for effective action to be taken.  An enormous crisis is almost on our doorsteps.  How bad will it have to get before public opinion demands action?  It is very hard to remain optimistic about the future of our country when we appear to lack the collective will to take the action which is so obviously needed

Is inequality Holding Back the Recovery?

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The Nobel prize-winning Keynesian economist, Joseph Stiglitz, claims in the January 20, 2013 New York Times, that “Inequality is holding back the recovery”.  He says that the most important reason is because the middle class is too weak to support the consumer spending we need.  And that the weakness of the middle class is holding back tax receipts.  And that we are squandering our young who are increasingly unable to get an education without borrowing huge sums of money.

Many liberals deplore the slow rate of economic growth since the recession ended in June 2009 and all of the problems it creates and exacerbates such as high unemployment and lower tax revenue to support public services.  What these liberals amazingly fail to understand is that there are tried and true methods to promote economic growth.  What we need to do is to lower tax rates (offset by eliminating tax deductions and loopholes), remove or diminish the enormous new regulatory burdens which have recently been placed on the economy, boost domestic energy production and aggressively, rather than halfheartedly, pursue new trade agreements to lower the barriers to free trade.

Powerful trends such as globalization and computer technology are driving economic progress and causing the inequality which Stiglitz and many others deplore.  We need to embrace these trends and use them to our advantage.  The way to boost the middle class is to boost our stagnant economy in the tried and true ways which have worked in the past.  The way to boost postsecondary education is to recognize that there are many high quality and low cost schools all over the country.  And that it is not necessary to borrow lots of money to get a good education. 

In short, the solution to the urgent and critical economic and fiscal problems we are now facing lies entirely under our control.  All we need are national leaders who have the vision, capability and fortitude to lead the way.

No Deal is better than a Bad Deal

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It is beginning to look like President Obama and House Speaker Boehner may not be able to negotiate an acceptable deal by December 31st to avoid going over the Fiscal Cliff.  The President wants tax rates to rise for incomes above $400,000.  The Speaker has offered to raise tax rates for incomes over $1,000,000 but it is not clear if House Republicans will go along with this, even if accepted by the President.

What is the effect of such increases in tax rates?  According to the Wall Street Journal, raising taxes for incomes over $500,000 would affect 750,000 small business owners, while an income cutoff of $1,000,000 would affect 311,000 small business owners.

What will be the economic impact of restoring Clinton era tax rates on small business owners?  A recent study by Ernst & Young predicts that employment would fall by 710,000 jobs and that economic output (GDP) would decrease by 1.3% on an annual basis.

Conclusion:  although more tax revenue is needed, as well as significant spending cuts, to get our fiscal house in order, it matters where this new revenue comes from.  What we really need is pro-growth tax reform.  This means lowering marginal tax rates and curtailing deductions and loopholes.

Yes, it is preferable to avoid going over the fiscal cliff.  But a deal needs to be structured which puts us on a sound fiscal and economic track for the long term.  Principle matters.  No deal is better than a bad deal.

Avoiding the cliff and restoring confidence

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New York Mayor Michael Bloomberg has proposed a sensible way forward with an Op Ed column, “Avoid the ‘Cliff,’ Restore the Confidence” in the December 12, 2012 edition of the Washington Post . His thesis is that businesses took on too much risk in the run up to the 2008 crash but now they are sitting on hordes of cash because they lack confidence that our political leaders can come up with a serious, credible plan to reduce the deficit and put our country on a sustainable path to economic growth and fiscal health.

His proposal for accomplishing this task is remarkably similar to that outlined by David Walker and discussed in my previous post on December 10, 2012.  That is, we should adopt the Simpson-Bowles framework, including tax increases and spending cuts.  At least a significant down payment on this plan should be agreed to before the end of the year.  The agreement would include a commitment to enact broader-based tax reform and entitlement reforms in 2013.

With trillion dollar deficits for four years in a row, now going on five, we definitely need more tax revenue as well as large spending cuts.  The biggest challenge in implementing this general framework is to figure out how to raise tax revenue in the least damaging way to the economy.

The tradeoff here is between raising tax rates versus eliminating tax deductions and loopholes.  Democrats (apparently) prefer raising tax rates rather than eliminating deductions.  This is unfortunate since it is well established in economic theory, as well as plain common sense, that the lowest possible marginal tax rates will provide the greatest stimulus to private risk taking and investment. This is the only sound way to create more jobs.

Democrats may have the strongest political position in the current negotiations but the Republicans have the soundest basic economic principles.  If the Republicans are able to keep the focus on the fundamentals, we will succeed in finding the way out of our current predicament.

Jumping off the cliff with Barack

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Washington Post columnist Charles Krauthammer urges the House Republicans to make it clear that they are willing to go over the fiscal cliff if it proves to be impossible to get a budget deal which includes significant spending cuts as well as tax revenue increases.  His most recent column, which appeared in the December 2, 2012 Omaha World Herald, points out that the Republicans have plenty of leverage if they are only willing to use it.

Many economists claim that restoring the Clinton tax rates for everyone, as well as the $110 billion automatic spending cut sequester,  which would be the consequences of going off the cliff, would cause a new double-dip recession with a big increase in unemployment.  No one really wants to take the chance of finding out if this scenario would actually play out, neither Democrats nor Republicans.

With an exploding national debt, caused by trillion dollar deficits for the last four years in a row, with no end in sight in the near future if present policy continues, the Republicans will generate huge public support for substantial, but sensible, cuts in both discretionary and entitlement programs.  Nothing should be off the table, neither further defense cuts nor reforms to all of the big three entitlement programs: Social Security, Medicare and Medicaid.  Republicans will be viewed most favorably by the general public if they do not try to protect any sacred cows in this process.

The biggest cudgel held by the Republicans, is the looming need, in the next few months, to raise the national debt limit.  Republicans should wield this cudgel in an especially visible fashion, and will be supported by the American people for doing so.  This, after all, is the bottom line.  Somebody has to say no to runaway deficit spending, and the Republicans need to make very clear that they are highly committed to accomplishing this urgent task.

Solving our economic and fiscal problems

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“The Election winners must choose between fiscal calamity and compromise” said Robert Bixby, Executive Director of the Concord Coalition, in a blog post yesterday.  “There must be spending cuts, including reform of our major entitlement programs such as Medicare, Medicaid and Social Security.  And there must be tax reform that broadens the base, maintains progressivity and increases revenues.  And all of this must be, and indeed can be, done in a way that enhances economic growth.”

This is an excellent statement of our country’s dire fiscal condition at the present time, put very clearly but in a nonpartisan and non-confrontational way.  It is critical that our national leaders, all of them and from both political parties, focus their full attention and efforts, on solving this problem.  As a highly interested local office holder in Omaha NE, I will be using this blog format to state in a direct and unequivocal manner what action Congress and the President should take in the days ahead to put our nation on a sound and sustainable economic and fiscal track.

Our immediate goal must be to stabilize (i.e. stop adding to) the national debt and this means quickly shrinking the size of our annual deficit until it either disappears entirely, or is at least greatly reduced.

First of all, we need to do a better job of growing the economy.  This will not only put more people back to work, but will also raise additional tax revenue, which will shrink the deficit.  In the meantime, while we’re working harder to stimulate the economy and make it grow, we also need to get started on making huge spending cuts in our national budget.  Let’s cut from programs across the board, especially including entitlements.  This is not only the fairest and most nonpartisan way to attack the problem but will also achieve the biggest overall spending cuts.

In the weeks ahead I will be as specific as I can possibly be on where spending cuts can be made.  I will also try to stay locally focused.  In other words, I will be paying close attention to the Nebraska congressional delegation and what our own representatives are doing on tax and budget matters.  Please consider contributing your own ideas to this forum so that we can work together to effectively address our country’s urgent fiscal problems!