Is America in Decline?

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A new book by the two economists Glenn Hubbard and Tim Kane “Balance: The Economics of Great Powers from Ancient Rome to Modern America” analyzes the decline of many of the great empires and civilizations in human history.  According to the authors, they all declined (or are now declining!) primarily for internal economic reasons rather than from external military threat.  The authors conclude that America’s own existential threat is fiscal.  Our lowest debt level in recent years was 23.9% of GDP in 1974 ($344 billion) which has climbed to 75% of GDP today ($12 trillion) and is predicted to keep growing worse in the years to come.
Our political system is too polarized to solve our huge debt problem.  Republicans want lower taxes; Democrats want higher spending.  If Republicans succeed in cutting spending, it upsets the voters and gives the Democrats an advantage.  If Democrats succeed in raising taxes, it upsets the voters and gives the Republicans an advantage.  So we end up with low taxes, high spending, fiscal imbalance and political stalemate.  This is the dilemma we are in.
But the authors propose a solution: a flexible balanced budget constitutional amendment where total outlays for a year do not exceed the median annual revenue collected in the seven prior years.  A three-fifths supermajority of each house of Congress can declare a one-year emergency exemption.  Additional one-year exemptions may be approved only by escalating votes in each house of Congress.  The amendment would take effect in the seventh year following ratification by the states.  During the seven year transition period the deficit would be reduced gradually each year until it reached zero.
Messrs Hubbard and Kane provide an excellent, nonpartisan analysis of the deep predicament in which our country now finds itself as well as an attractive means of extricating ourselves from this precarious situation.

Will Higher Inflation Help the Economy?

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The New York Times’ Eduardo Porter has a column in yesterday’s paper “Making the Case for a Rise in Inflation”, arguing that a 4% inflation rate, for example, would be a better target rate for the Federal Reserve than its present 2% target rate.   The idea is that higher inflation would lessen the value of a dollar, thereby eating away at our $12 trillion in public debt (on which we pay interest).  A lower value of the dollar would also boost the economy by making exports less expensive.  Higher inflation would likewise encourage consumers to spend more because the value of the dollar is decreasing more rapidly.
Mr. Porter does point out that there would be opposition to any policy of purposely letting inflation go up.  The best known Fed Chair in recent years, Paul Volcker, says that “All experience amply demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse”.
The biggest problem, though, is the risky procedure of trying to boost the economy with monetary policy (quantitative easing, QE1, QE2 and QE3) rather than using fiscal policy (tax reform and deregulation).  The creation of an enormous amount of new money in a slow recovery creates huge upward pressure on inflation.  The economy is slowly improving on its own accord.  Very soon (in the next few years) the Fed will have to perform the difficult function of withdrawing money from the system fast enough to avoid inflation and, at the same time, slow enough, to keep interest rates from skyrocketing.  So the question is, will the Fed be able to simultaneously keep both inflation and interest rates under some kind of control?
For sure we don’t want to make its job more difficult by pushing inflation any higher than necessary at the present time!

The Folly of Paul Krugman

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In yesterday’s New York Times Paul Krugman has a column “Fight the Future” in which he says that “fiscal contraction” is “undermining what might otherwise have been a fairly vigorous recovery” and that  focusing on long run fiscal sustainability “isn’t a way of being responsible”.  He compares our fiscal problems with global warming and says that the “uncertainty about the impact of greenhouse gases on global temperatures actually strengthens the case for action, to head off the risk of catastrophe”.  But “delaying action on entitlement reform has no comparable cost”.  He even says that seeking a “grand bargain” that links reduced austerity now to longer-run fiscal changes is harmful because it would involve negotiating with untrustworthy Republicans!
First of all, there has been no real fiscal austerity in the past five years.  Federal expenditures took a huge jump from 2008 to 2009 and have increased each year since, in spite of huge deficits.  The sequester will not cut spending in 2013 compared with 2012 but only slow down the rate of increase.  There is little, if any, uncertainty about how fast the costs of healthcare in general, and Medicare in particular, will increase in the years ahead.  The current slowdown in healthcare costs in the last few years still leaves it growing at twice the rate of increase of GDP.  Demographics alone clearly show that the cost of Medicare will start increasing even more rapidly in just a few years from now.
Mr. Krugman concludes by saying that “influential people should stop using the future as an excuse for inaction.  The clear and present danger is mass unemployment, and we should deal with it, now.”  I basically agree with him!  The question is how!  Should we deal with it by artificial stimulation (bigger deficits and more debt) or rather by boosting the private sector with tax reform and strategic deregulation?  It takes two to tango and Mr. Krugman doesn’t help by constantly ridiculing the Republicans!

The Urgency of the U.S. Debt Problem

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In Friday’s Wall Street Journal Kimberley Strassel has a column “Rebooting the Budget Talks” which discusses a new approach to budget planning being taken by Wisconsin Senator Ron Johnson, a Republican.  Mr. Johnson wants to go beyond the usual 10 year budget planning by using 20 and 30 year projections from the Congressional Budget Office for both tax revenue and spending.  Even assuming that current federal government spending grows only by population growth plus inflation (which would require unusual restraint), by 2043 the national debt will have increased by $72 trillion, with public debt (on which interest is paid) amounting to 139% of GDP.  See “Thirty-year deficits and debt” for more detail.
Of course, it is easy to say that 30 year projections are way too long to have real credibility, and so let’s just stick to the usual 10 year projection which shows the public debt shrinking from today’s 75.1% to 73.6% in 10 years and so therefore becoming “stabilized”.  Most of us old folks will be gone but today’s young and middle aged people will still be around 30 years from now and so should be very much concerned about our likely fiscal condition in 2043.  And the CBO 30 year projection assumes such unlikely restraint that the debt will probably be even greater by then.
The reason why a 30 year projection is so much worse than a 10 year projection is because  the entitlement explosion is much greater in the out years compared with just the next 10 years alone.  Conclusion: the mild restraint on entitlement growth (such as a chained CPI) being reluctantly offered by Democrats today is an entirely inadequate way to curtail entitlement growth for the long haul.  Let’s get real and propose real solutions to our nation’s urgent fiscal problems.  We’ve been kicking the can down the road for way too long already.  We can no longer afford to postpone significant action until some future date when conditions are more amenable for reform.  We must act now!

Looking for Help!

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America is in a tough position at the present time, both economically and fiscally.  Our economy is stuck in a slow growth mode of 2% per year, ever since the end of the recession four years ago.  The unemployment rate, now 7.6%, is dropping only very slowly which means many millions of people are either unemployed or underemployed.  Our national debt, now almost $17 trillion, is still growing rapidly.  As interest rates increase and return to normal levels, as they may be starting to do already, just paying the interest on this enormous debt load will take an increasingly large portion of government revenues in the years ahead.  At the same time entitlement spending, on Social Security, Medicare and Medicaid, is also increasing rapidly.  It is absolutely essential for our national leaders to strongly focus on finding solutions for these escalating problems and only a few of them, but not nearly enough, are making a concerted effort to do this.
I am trying to do something about these critical and urgent problems.  First of all, I challenged the incumbent Congressman for Nebraska’s Second District, Lee Terry, in the Republican Primary in May 2012, but to no avail as he was easily re-nominated and then re-elected in November 2012.
After the 2012 elections I set up a blog: https://itdoesnotaddup.com/ to address these critical national issues and to propose ways of addressing them.  There are over fifty individual posts by now which go into much detail on possible actions that could be taken at the national level to make more progress on all of these matters.  But I need to reach a wider audience and to create a greater sense of the eminent danger we are in if we don’t take our current situation more seriously.
I have employed a graphic designer to come up with a new and more exciting logo and website to hopefully create more visibility for what I am doing.  Take a look: http://thebudgetjack.com/.  I am also looking for one or more people to help out with new content for the new website.  Perhaps it could be authoring a separate but related series of blog posts on these same issues.  Or perhaps by contributing a new feature to the website which would never occur to me on my own.
If you have any ideas about any of these things, please let me know.  I am easy to reach at jackheidel@yahoo.com. I look forward to hearing from you!

Fiscal Fixes for the Jobless Recovery

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The economist Alan Blinder has a column in yesterday’s Wall Street Journal entitled “Fiscal Fixes for the Jobless Recovery” where he deplores the apparent complacency about our stubbornly high unemployment rate of 7.6% after four years now of recovery from the Great Recession.  His solutions: 1) boost government employment with greater deficit spending, 2) offer businesses a tax credit equal to 10% of the increase of their wage bills over the previous year, and 3) offset the high 35% corporate tax rate by taxing a company’s repatriated profits at a super low rate, based on the increase of its wage payroll.
What Mr. Blinder describes as complacency about the high unemployment rate is rather just huge frustration about the likelihood of a divided Congress being able to reach agreement on any fundamental reforms which would be able to boost economic growth.  His proposals illustrate why the philosophical chasm between the two political parties is so great.  In the first place, boosting government employment by increasing deficit spending is a total nonstarter.  Our enormous and rapidly increasing national debt is a major part of the problem.  We need to decrease government spending, not increase it.
We need to simplify the tax code, not make it more complicated with a new 10% tax credit.  Lowering tax rates overall, offset by eliminating special tax preferences for the well connected, is the type of fundamental reform which will truly boost the economy, by giving everyone the same greater opportunity to create wealth.
Since Republicans think that a 35% corporate tax rate is too high and Democrats think that too many companies are able to shelter their profits abroad, then why can’t we just lower the rate and change the rules to the point where multinational corporations will want to bring their profits home, pay taxes and reinvest in America.  A new tax credit just makes things more complicated!
What is needed to break the log-jam is leadership from our elected representatives, not more ideological name calling.  There are practical solutions to our economic and fiscal problems if we simply had more leaders who are focused on finding solutions rather than scoring points on the opposition!

Should Nebraska Adopt the Common Core Standards?

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Yesterday’s New York Times has an article by Andrew Hacker and Claudia Dreifus “Who’s Minding the Schools?”, which makes a strong case against the so called Common Core education standards already adopted by 45 states.  Their argument is that the standards are a “one-size-fits-all pathway governed by abstract academic content” which will primarily benefit the affluent middle class students who have strong parental support and who will go on to attend selective colleges.
About a year ago Mr. Hacker wrote another NYT article “Is Algebra Necessary?”, pointing out all the grief resulting from requiring high school students to learn algebra.  The Common Core standards have a strong algebra component and so they will tend to solidify the expectation that all high school students study algebra and learn it well.  This is an especially big challenge for low income and minority students who have the least academic success in high school and are the most likely to drop out before graduation.
Both the U.S. Senate and the House are currently considering legislation to renew No Child Left Behind by giving states more flexibility in figuring out how to increase educational success for their own students.  This makes a lot of sense and should make it possible to cut back substantially on the approximately $100 billion per year spent by the federal Department of Education on grants to the various states.  In other words, for various reasons there is currently taking place a shift in educational policy to give more control and responsibility back to the states.  The Common Core standards are attempting to move things towards more federal control and therefore are likely to face very strong headwinds.

After the Crisis: The Power Inversion and What It Means

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In today’s New York Times David Brooks has a column “The Power Inversion”  describing a shift of economic and political power from the federal government to municipal governments.  Of course, the rural to urban population migration has been taking place for many years.  But now the financial crisis and resulting political stalemate in Washington is causing civic leaders to take more initiative in addressing economic problems.  The Brooking Institution’s Bruce Katz gives many specific examples of such initiatives in a recent speech “After the Crisis: The Metropolitan Revolution”.
This shift of power away from Washington and back to local government could have big ramifications for the federal budget which, as almost everyone knows, is currently running huge deficits.  Here is a good example to start with.  The U.S. Senate is about to take up revision of the No Child Left Behind law which expired several years ago.  A bill, Strengthening America’s Schools, has been introduced by the Democratic majority for this purpose.  It allows states to create their own education reform plans and sets testing and performance standards for all states to follow.  It is much more flexible than NCLB.
Congress should take this opportunity to reorganize the federal Department of Education by greatly consolidating its huge number of individual programs (over 100 separate programs in K-12 education alone).  Support for state education programs could be given in much larger chunks thereby giving states and school districts more leeway in figuring out the best way to divide up and allocate their education dollars.  The total federal budget for education could be significantly reduced in this way and the states will, at the same time, be able to do a better job with fewer dollars because there will be fewer strings attached.
This is a smart way to shrink the federal deficit and we should take advantage of it!

Free Market Healthcare in America: How Do We Get There?

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Almost everyone agrees that healthcare in the U.S. is way too expensive but how do we change to a better system?  Douglas Holtz-Eakin and Avik Roy have laid out a roadmap to do this: “The future of free-market healthcare”.  Here is the essence of their plan: 1) start with what we will soon have under Obamacare: subsidized health-insurance exchanges; 2) limit subsidies in the exchanges to incomes up to 300% of the federal poverty level as in Massachusetts and also limit the growth of subsidies to the overall growth rate of the economy; 3) use the exchanges for Medicare reform by raising the eligibility age for Medicare by 3 months each year.  Retirees would then gradually migrate into the defined contribution system of the exchanges; 4) gradually shift Medicaid enrollees into the exchanges.  The exchanges would allow them to move up the income ladder while maintaining their health insurance.
Eventually all low income and retired  Americans would become part of a unified health-insurance system based on the exchanges which would provide subsidies as needed.  I would add one additional feature to this system:  remove the tax exemption from employer provided insurance.  This would, of course, create healthcare cost consciousness amongst employees.  Employers could still offer a health insurance package to their employees but it would become part of their taxable compensation.  They might decide to join an exchange instead for a better deal.
Such a system as outlined above is based on the Swiss free market model.  The Swiss choose their own doctors and have short waiting times for appointments.  The cost of healthcare in Switzerland is about half as much per person as in the U.S. so we would achieve a huge savings.  We have got to make big changes in the way we deliver and pay for healthcare in the U.S. and here is one way to do it!

Colonoscopies Show Why American Health Care is So Expensive

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Yesterday’s New York Times has an excellent article, “The $2.7 Trillion Medical Bill”, which uses a detailed analysis of the cost of colonoscopies to show why American healthcare is so expensive.  In the U.S. an insurance company pays about $3500 – $4000 for a colonoscopy compared with the cost for the procedure in Europe of between $400 – $800.  Also the price can vary enormously, from as little as $665 (in Utah) to as much as $8577 (in New York City).  There are all sorts of reasons for this huge variation in cost, for example, whether or not an anesthesiologist is used as well as a gastroenterologist, and whether the procedure is performed in a surgical center rather than in a doctor’s office.
The basic problem, of course, is that in the U.S. nobody is sufficiently responsible for the bottom line.  The patient isn’t responsible because the bill is paid by the insurance company.  The insurance company negotiates with healthcare providers but the insurance premium is paid by the patient’s employer.  If the insurance company has to pay too much in claims one year, then it just raises insurance premiums for the following year.
The problem is getting so serious that it will soon have to be dealt with in a comprehensive way.  There are essentially two different ways to proceed.  One is to have a single payer system like most of Europe and Canada.  Healthcare would be tightly controlled by the federal government which would set prices and ration care.  The cost of healthcare would be controlled but we’d be giving up a great deal of personal freedom in return.  Basically it would amount to expanding Medicare into a rigidly prescribed national healthcare system.
The alternative is to adopt a new payment system which makes each of us directly responsible for the cost of our own healthcare.  The best way to accomplish this is to remove the tax exemption from employer provided health insurance.  Health insurance could still be provided by an employer but it would be considered a part of total salary and be taxed as such.  Then the employee, as well as any self-employed person, would have a direct personal stake in setting up an efficient health insurance plan to keep the cost of healthcare under control.
Americans put great emphasis on personal freedom and responsibility and I believe that most of us would prefer this latter free market approach to healthcare rather than a single payer system like what most of the rest of the world has!