As I often say on this blog, I am optimistic about the future of America.  But, of course, we do have big problems that must be overcome for us to continue to be the strongest country in the world.  Consider:

• It appears more and more likely that the 2024 Presidential election will be between Joe Biden and Donald Trump, two of the poorest Presidents in American history. I say this because neither of them is willing to take our exploding national debt problem seriously.
• I voted for Clinton in 2016, because of the Trump sleaze factor, but for President Trump in 2020 because I thought he did well in his first term (tax reform, deregulation, good judicial appointments). But his election denialism about 2020 has made him a huge liability to the Republican party.  Trump’s many poor endorsements in 2022 cost Republicans control of the Senate in the current Congress.
• President Biden has done some good things in foreign policy like supporting Ukraine and improving relationships with our Asian allies to make us better able to contain China. But Bidenomics is a disaster, see here and here.  The Biden Democrats not only tripped off inflation with the $1.9 trillion American Rescue Plan in March 2021; but now are prolonging inflation with continuing huge annual spending deficits ($1.4 in FY 2022 and $1.7 trillion in FY 2023, as projected by CBO).
• Our biggest adversary, China, is stumbling badly with its economy. Its working-age population is beginning to fall dramatically because of its (now-discontinued) policy of one child per family.  It also needs a faster transition to a consumer-led economy, such as the U.S. has, to make growth more sustainable in the long run.
  
• Because of Russia’s disastrous invasion of Ukraine in February 2022, its economy is now in decline, as pointed out by Evan Gershkovich in his now-famous WSJ article (which is likely why he is now in Russian jail).

Conclusion.  We may be in store for five more years of poor presidential leadership.  But our free and open democratic system is so superior to China’s and Russia’s that we should be able, nonetheless, to continue our upward trajectory of growth and progress.  China and Russia have autocratic political systems and so for them, poor leadership does great damage to their societies (because it is almost impossible to challenge from within).

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As we approach the 2024 Presidential election and the contenders present themselves to the voters, I assess the candidates, just like everyone else.  I have previously stated one essential quality I am looking for in a President: fiscal responsibility.  But, of course, there are other important attributes as well.  Here is my first attempt to describe these essential qualities in a coherent way.  Three of the most important:

• An optimistic vision for the future of America. We are the strongest and freest country in the world for many reasons.  We aspire to equal opportunity for everyone and work hard to achieve this ambitious goal.  When we fall short, for example, with poor educational outcomes, educational choice springs up in the form of charter schools and/or private school vouchers.  We put a strong emphasis on economic growth and opportunity.  It is no accident that we are a highly innovative society because our economic system encourages growth and development.
• Fiscal responsibility. One of the major themes on this blog is the urgent need for fiscal responsibility from national leaders.  Our huge and rapidly growing national debt is unsustainable.  The $5 trillion pandemic spending blowout tripped off inflation starting in early 2021, which has forced the Federal Reserve to raise short-term interest rates to 5.25% so far and perhaps higher.  This enormously increases interest payments on the debt that, in turn, makes our deficits and accumulated debt much worse.  The debt problem cannot be fully addressed without major reforms in entitlement spending.
• A hawkish view of national security. Although we are the strongest nation in the world, we have two major rivals for predominance, China and Russia.  It is critical that we continue to help Ukraine defend itself from the Russian invasion.  It is not only the morally right thing to do but also in our own best interest to defend freedom and democracy around the world.  Our help for Ukraine, for example, will likely deter China from trying to invade Taiwan.
• Republican presidential candidates. Based on her performance in the first presidential debate, see here and here, Nikki Haley is the only candidate in either party so far who meets all three of the above essential requirements to be President.  She has an inspiring personal story, she understands the seriousness of our debt problem, and she supports our defense of Ukraine.

Conclusion.  Being optimistic about the future of America, understanding the seriousness of our debt problem, and being committed to the strong defense of freedom and democracy around the world, are three very important qualities needed by our next President.  So far, Nikki Haley is the only candidate in either party who has demonstrated these essential qualities.  Much further discussion on this issue will follow as the campaign proceeds!

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My last post pointed out that the currently strong economy, stimulated by huge deficit spending, is likely to keep inflation higher for a longer period of time.  This means higher interest rates which, in turn, means much higher interest payments on our rapidly exploding debt, leading to even higher annual deficits.  This is a vicious trap we have fallen into.  It is critical to take immediate steps to turn this perilous situation around.

Here is the latest data which reinforces this pessimistic view of our current situation.  Consider:

• Interest rates and the Federal Reserve.  The CPI is up to 3.2% for July, “only” slightly higher than June’s 3.0%.  But core CPI, excluding food and energy prices, is still higher at 4.7%.  And the price of gas has risen significantly in the past few weeks.  In other words,  the Federal Reserve will likely decide to raise interest rates even higher later this year.  And, of course, this is in addition to the damage inflation is already causing by negating wage increases (see chart).

  

• The likely rapid increase in interest payments on the debt. This is the scary part.  The first chart shows that over half of the U.S. treasury bonds financing our national debt come due within the next few years.  This means that they will soon be rolled over at much higher interest rates.  Based on the current 5.25% short-term interest rate, CBO projects that interest payments on the debt will reach $1 trillion per year by 2028.  If interest rates rise only .5% more, interest payments will reach $1 trillion by 2026.  And of course, interest payments continue to rise sharply after that.

  

• In FY 2023 (this year), interest payments will be almost $700 billion out of a total debt of $1.7 trillion (as estimated by CBO). In other words, deficit spending, without including interest payments, is already hitting $1 trillion annually and rising.  Simple arithmetic shows that our total annual deficit could hit $2 trillion by 2026 as it continues upward.  This is scary!

Conclusion.  Inflation (with concurrent increases in interest rates by the Fed) is making our annual spending deficits grow much faster than otherwise.  This, in turn, overstimulates the economy which is already growing nicely.  Which, in turn, causes inflation to stay higher for longer.  We have created a vicious circle feeding on itself.  We need to break this harmful cycle as quickly as possible.  Significantly lowering annual deficit spending is the only way to do it!

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I have long been saying on this blog that our most serious national problem is the huge national debt, now over $32.4 trillion.  And now, persistent inflation, coupled with a strong economy, is exacerbating this debt problem.  Consider:

• Strong Economy.  There were 187,000 new jobs created in July.  Wage gains are finally, after two years, exceeding the increase in inflation.  Job vacancies are high and exceed the number of unemployed.  Labor participation rates are also high.
• Persistent Inflation.  Although the Consumer Price Index (CPI) grew only 3% in June, core inflation (excluding food and energy) was a significantly higher 4.8%.  And, of course, Fed imposed higher interest rates mean high mortgage rates, badly hurting the housing market.
• Huge Annual Deficits.  The deficit for FY 2022 was $1.4 trillion.  CBO estimates the 2023 deficit will be $1.7 trillion.  And deficits are projected to keep rising in the future.

The problem in a nutshell.  The $5 trillion Covid pandemic stimulus set off an inflationary spiral, beginning in Spring 2021.  Belatedly the Federal Reserve has raised short-term interest rates to 5.25%.  This has slowed down inflation but not yet back to the desired level of 2%.  Either interest rates must go higher still, or the CPI will linger at a 3% or higher level.  In the meantime, the higher interest rates have raised interest rates on our $32.4+ trillion debt which has massively raised interest payments on the debt.  This greatly increases the annual deficits, which become part of the total debt.  And the increasingly high deficits continue to overstimulate the economy, which, in turn, puts upward pressure on inflation.

The solution is clear.  A strong economy does not need extra fiscal stimulus.  Annual deficit spending must be greatly reduced.  This may slow economic growth somewhat but, in turn, will make it easier for the Fed to bring inflation back down to the 2% level.  In other words, the key to curbing inflation, and getting economic growth back on a sustainable course, is to greatly reduce annual deficit spending.  This can be done if our national leaders are willing to spend the political capital to do it.

Conclusion.  Our current combination of a strong economy, persistent inflation, and high annual fiscal deficits puts our country in a dangerous trap that could easily spiral out of control if not reversed.  The key is to significantly reduce annual deficit spending, as described above.

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Many things are going well in the U.S. We are a free and open democratic society.  Our two major political parties compete vigorously for votes.  We are the strongest country in the world, both economically and militarily.  Together with our many democratic allies, we are helping Ukraine defend itself against Russian aggression.

But we have a huge problem on the horizon that we are handling poorly: the national debt.  It is now over $32 trillion and growing rapidly.  The annual deficits, that collectively make up the debt, are now over $1.5 trillion each year and growing.  Let’s look at the big picture on our debt situation.

Consider:

• Major healthcare programs are the largest single item in the federal budget at 24%. They are also the fastest-growing category of the federal budget (along with net interest).  The Washington Post has shown that it is possible to save almost $100 billion per year in Medicare costs alone by more effective management of the program.  The largest single component of this savings, $40 billion, comes from making Medicare Advantage more cost-effective.  Other big savings for Medicare would come from the more careful addition of new procedures.  Medicare is an important social program but must be reformed to remain sustainable.
• Social Security. SS makes up 22% of federal spending and its spending is not growing as fast as healthcare programs.  Nevertheless, it also needs some relatively small tweaks to remain sustainable, such as raising the eligibility age, and making means adjustments for benefits (down for the wealthy but also up for low-income recipients).
• Non-defense discretionary spending. This is only 15% of the total budget but still offers opportunities for big savings.  This is precisely what the House Republicans focus on in the current discussions about the FY 2024 budget.  As you can see from the attached chart, there is a $119 billion discrepancy between what the House Appropriations subcommittees have allocated for next year and what the corresponding Senate subcommittees have allocated.  These differences will be resolved in joint meetings between the House and the Senate.  Clearly, there is potential for large savings compared to what was enacted for FY 2023.

Conclusion.  We simply cannot continue our current path of annual spending deficits of $1.5 trillion and higher.  There is more and more public awareness of this simple arithmetic fact.  The current trend toward governmental decentralization will help.  But we also need major spending restraint at the federal level.

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As I often point out, a free and open society like ours always has big problems to address: a huge and rapidly growing national debt, for example.  Another problem is how to best relate to our major autocratic rivals, such as China, Russia, and Iran.  A third big problem is the extreme political polarization our country faces.  But as I also say, I am an optimist about the future of the U.S.  One reason for my optimism is the increasing trend of decentralization in American government and society in general

Consider:

• Abortion law. The repeal of Roe vs. Wade by the Supreme Court a year ago was long overdue.  Clearly, the U.S. Constitution has no guarantee of abortion rights and, therefore, according to the 10^th Amendment, it is an issue that needs to be resolved by the democratic process that, for practical purposes, means at the state level.  This is exactly what is now happening.
• Educational choice. Eight states: Arizona, Arkansas, Florida, Indiana, Iowa, Oklahoma, Utah, and West Virginia, have recently adopted universal educational choice at the K-12 level in their states.  This has happened because of huge dissatisfaction with the public schools, exacerbated by excessively long school closings during the Covid pandemic.  School choice will be especially useful for low-income, often minority children in failing inner-city schools.   Better educational achievement is what African/American children most need for faster social and income mobility.  This is even more important now that the Supreme Court has struck down racial discrimination in college admissions.

  

• Migration. After the 2020 census, Texas gained two congressional seats, and Florida and North Carolina each gained one.  Also, California, Illinois, and New York each lost one seat.  This corresponds to the significant business and personal migration which took place in 2021 because of unnecessary Covid lockdowns as well as much higher tax rates in the out-migration states (see chart below).  In other words, more attractive state policies on social and tax issues will draw people from the more oppressive states.

  

• Fiscal responsibility and debt. The House Republicans are making a huge effort to cut discretionary spending in the FY 2024 budget.  Of course, this doesn’t solve our debt problem by itself (entitlement reforms are also badly needed at the federal level), but it could begin a valuable new trend.  Shifting major spending categories from the federal government to state governments would reduce federal deficits and save money overall because state governments have balanced budget requirements.

Conclusion.  As I have illustrated, there is a major trend developing of sending both social issues (abortion and education) and spending issues back to the states for resolution at the state and local levels.  This is a positive movement that could eventually lead to a less divisive resolution of major national issues.

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In a free and open democratic society like ours, there are always challenging problems that need to be addressed.  In addition, the entire free world depends on our leadership.  Thus the U.S. has a huge responsibility, not only to ourselves but to the entire world as well, to succeed and prosper.

The biggest problem we face at the present time is our huge and rapidly growing national debt.  I have devoted several recent posts to the magnitude of this problem, see here and here.

The recent budget/debt ceiling agreement between the House Republicans and President Biden is a small step in the right direction.  But far more needs to be done, especially on entitlements, and even more specifically on Medicare.  The Manhattan Institute has given an excellent description of the problem and the changes needed, see here and here. Consider:

• The cost of Medicare is expected to double within a decade, rising to $1.9 trillion in 2032, twice the spending on defense. This will be a major contributor to the increase in debt from 98% of GDP in 2022 to the projected increase of debt to 185% of GDP over the next 30 years.
• It is possible to fix this problem without harming beneficiaries. Medicare Trustees estimate that the increase in the program’s cost from price and demographic changes is likely to be less than economic growth over coming decades.  That is to say, the cost of delivering existing Medicare services to future retirees is expected to decline as a share of GDP.
• The program’s expected growth is instead driven by the constant addition of new procedures and services to what is covered by Medicare with no legislative oversight to ensure that taxpayers are getting value for their money.
• Between 1997 and 2011, 85% of the increase in real per capita Medicare spending was on newly created procedure codes marking additional medical services. For example, spending on physician-administered drugs surged from $3.4 billion in 2000 to $17.1 billion in 2019, $14.9 billion of which was on codes that didn’t exist in the year 2000.
• At the present time, there is little filtering of whether new additions are cost-effective. Federal law requires that any adjustments, to fees for existing services, have a neutral effect on the federal budget.  But no such constraint applies to CMS’s billing-code additions.
• The result is that neither Congress nor the Executive Branch is responsible for considering the cost of adding new services to the basic Medicare benefit package. To close this costly fiscal loophole, Congress should be required to ratify any new deficit-increasing billing codes to Medicare.  This would force Congress to stop passing the buck to federal bureaucrats.
• Congressional action to expand basic benefits would still be warranted in the case of high-value new services whose coverage Congress seeks to ensure for all, and which it wishes to be paid for by all taxpayers, rather than just Medicare beneficiaries.

Conclusion.  Entitlements in general, and Medicare in particular, are becoming way too expensive to the federal government and must have their costs reined in.  Our enormous and rapidly growing national debt cannot be adequately controlled otherwise.  The Manhattan Institute has explained how this can be done without burdening existing or future Medicare beneficiaries.

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The last few weeks I have been discussing the budget/debt ceiling debate and how it was resolved in the Fiscal Responsibility Act. Progress was made in controlling spending but it is just a start.  Much more needs to be done. Now the action turns to the House and Senate Appropriations Committees where specific sums of money will be allocated for each government agency for FY 2024. This process will be playing out over the next few months.

Looking ahead to the 2024 presidential election, our next president will likewise face some enormous fiscal challenges:

• Record debt levels. Debt held by the public is on track to reach 115% of GDP in 2033 from its current level of 100% of GDP today (see chart below).

  

• Growing interest costs. Not only is the national debt itself growing rapidly, but also interest payments on the debt are also growing rapidly because the Fed has been increasing interest rates to control inflation.  This, of course, makes the debt grow even faster (see chart below).

  

• Looming Trust Fund Insolvency. The highway trust fund, the Medicare Hospital Insurance trust fund, and the Social Security trust fund will all soon be depleted (see chart below).

  

• Major Expirations and the Risk of Costly Extensions. In October 2025 the recently enacted statuary caps on appropriations will expire.  By the end of 2025, major provisions in the Tax Cuts and Jobs Act of 2017 and the major expansion of the ACA health insurance subsidies will also expire (see chart below).  These expirations must be dealt with in a responsible manner.

  

The problem is that neither of the leading candidates for the presidential election in 2024,  President Biden nor former President Trump, have a serious commitment to fiscal responsibility.  For example, neither one is willing to rein in entitlement spending, the biggest driver of our rapidly exploding debt.

Conclusion.  There are many challenges facing the United States, all of which the new president, elected in 2024, will have to deal with.  One of these is our rapidly growing national debt.  Bringing the debt under control is an urgent problem.  Failure to do so puts the United States at great financial risk and therefore becomes a threat to democracy and freedom around the world.

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Last week I said that the new Fiscal Responsibility Act is a step forward in controlling annual spending deficits and, therefore, getting our national debt under control.  It does indeed slow down discretionary spending for the next two years and sets a lower spending baseline for the next decade.

But consider several ominous trends which are making the outlook worse:

• The Congressional Budget Office reports that the budget deficit for the first eight months of FY 2023 is $1.2 trillion, far more than last year at this time. CBO currently projects a deficit of $1.5 trillion for all of FY 2023 which appears to be very optimistic.

  

• The Committee for a Responsible Federal Budget reports that the budget deficit totaled $2.1 trillion over the past 12 months through May 2023. As can be seen from the chart below, this is because federal spending is growing rapidly while federal revenue is dropping.

  

• Inflation, tripped off by the $1.9 trillion American Rescue Plan in March 2021, is far from under control. The liberal economist, Larry Summers, estimates that the three-month Treasury Bill rate is likely to average 4% over the next ten years,  much higher than the 2.5% projection by the CBO.  Keep in mind that every 1% increase in short-term interest rates raises interest payments by $310 billion per year based on our current (but rapidly growing) debt of $31 trillion.

  

• At the present time, neither President Biden nor former President (and current candidate) Trump, are willing to support changes to the entitlement programs of Social Security and Medicare. Both need substantial changes to their finances to keep them sustainable for the future.  Social Security is conceptually easy (but not politically easy!) to fix (by raising the eligibility age and/or income caps) but Medicare is more expensive than SS and will need more dramatic changes.  Entitlement reform is an urgent matter and must soon be addressed by our national leaders.

Conclusion.  The recently passed Fiscal Responsibility Act is a plus but much more work needs to be done to put our growing national debt on a sustainable path.  The Wall Street Journal calls the need for federal spending restraint “the central issue of our time” and I totally agree!

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Congress has now passed, and President Biden has signed, the Fiscal Responsibility Act of 2023.  It suspends the debt limit until January 2025, after the next presidential election, as well as setting an overall budget for FY 2024, beginning on October 1, 2023.  According to the Congressional Budget Office (CBO), it will reduce deficit spending by $1.5 trillion over the next ten years, which is quite modest, given our very large and rapidly growing national debt of $31.4 trillion.

It is generally well understood that the entitlement programs of Social Security and Medicare are the biggest drivers of our exploding national debt.  Social Security needs some relatively modest tweaks (raising the eligibility age and/or income caps).  But Medicare’s future solvency is a much larger problem, which will have to be addressed soon.

Nevertheless, the just-enacted Fiscal Responsibility Act has several excellent features:

• It reduces non-defense discretionary spending from the 2023 level of $744 billion to $704 billion for 2024, although not quite to the 2022 level of $689 billion, see here and here.
• If the House and Senate fail to enact the required 12 appropriations bills for FY 2024 by the end of this calendar year, all discretionary accounts are subject to a 1% cut. In other words, a strong incentive is created for returning to “regular order” where spending amounts are debated and voted on by the various appropriations committees in both the House and Senate, rather than Congress passing an omnibus spending bill at the last minute.
• The important principle of work requirements for welfare programs is reinforced even though only small improvements are included in the new legislation.
• The fulcrum of the nation’s political mood appears to be moving to the right, on such major issues as spending, crime, the border, and parental rights. The Fiscal Responsibility Act, resulting from negotiations between President Biden and House Speaker McCarthy over the House Limit, Save, Grow Bill, establishes the Republican House as the prime mover of political change in the current highly polarized national environment.

Conclusion.  The new Fiscal Responsibility Act, passed by Congress and signed by President Biden, achieves only modest deficit reduction over the next ten years, but nevertheless is consistent with the somewhat conservative political mood of the American people and therefore could well lead to other valuable changes and improvements in national policy in the near future.

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