Our Dire Fiscal Situation I. The Facts

Posted on by
Reply

Capture

Take a look at the front page of a new report from the Congressional Budget Office, “The 2013 Long-Term Budget Outlook”.  It shows very clearly the huge fiscal mess confronting our country in the near future.
First of all, our national debt has almost doubled as a percentage of GDP in the last five years, from about 38% of GDP at the end of 2008 to 73% today.  Although the debt is actually projected to dip to 68% of GDP in 2018, it then begins a steady climb because of increasing interest costs as well as increasing spending on Social Security and government healthcare programs (Medicare, Medicaid and the Affordable Care Act).  The debt will be back to 71% of GDP by 2023 and then climb rapidly to about 100% of GDP by 2038.
Notice from the graph that federal tax revenues have just about recovered from the recession and will soon level off at their historical level of about 19.5% of GDP.  But federal spending will resume a steady climb, reaching 26% of GDP by 2038.  As the gap between revenue and spending gets wider and wider, the national debt grows faster and faster.  This is the enormous fiscal problem we are faced with in the next 25 years.   The worse it gets the harder it becomes to turn around.  It is imperative to address this problem without delay.
In order to reduce the debt from its current level of 73% of GDP down to the historical average of 38% by 2023, Congress would have to pass an additional $4 trillion in spending cuts or tax increases over the next decade.  The only way such enormous savings can be achieved is by reining in entitlement spending: Social Security, Medicare, Medicaid and ACA.  I will outline one way to do this in my next post!

The Link between Education and Prosperity, Part II: Educare

Posted on by
Reply

In my previous post, “The Link between Education and Prosperity”, I looked at data from Paul Peterson and Eric Hanushek which show a very close connection between high school academic achievement and rate of economic growth for various countries around the world.  They point out, for example, that only 32% of U.S. high school students are proficient in mathematics, as compared to 49% in Canada, and that closing this achievement gap would boost our rate of GDP growth by almost 1%.  But they also point out that the math proficiency rate for white students in the U.S. is 42% with much lower proficiency rates for both African American and Hispanic students.  In other words, almost 2/3 of the American-Canadian math proficiency gap can be explained by poor performance of American minority students, many of whom grow up in poverty.
In yesterday’s New York Times, James Heckman, a Nobel prize winner in economics, has an article “Lifelines for Poor Children” which points out the importance of investing in effective early childhood development from birth to age 5.  “High-quality early childhood programs are great economic and social equalizers – they supplement the family lives of disadvantaged children by teaching consistent parenting and by giving children the mentoring, encouragement and support available to functioning middle-class families.”
High quality early childhood education is expensive and it is very important for all levels of government, especially at the federal level, to operate more efficiently.  How is it possible to expand early childhood education under such very tight financial constraints?
The key is to build it into our existing Head Start program on which we are currently spending over $8 billion per year.  Many experts acknowledge that academic gains from Head Start are short lived, seldom persisting even into 3rd grade.  But there are existing models for much more effective early childhood education, such as the program run by Educare in Omaha and other cities.
In short there is a cost effective way to provide “lifelines for poor children”, for their own good and also for the benefit of society as a whole, and we should expect our national leaders to move in this direction.

The Link between Education and Prosperity

Posted on by
Reply

 

In Thursday’s Wall Street Journal, two education experts, Paul Peterson and Eric Hanushek, write about “The Vital Link of Education and Prosperity”.  They point out, for example, that only 32% of U.S. high school students are proficient in mathematics based on the National Assessment of Educational Progress test.  Comparable scores for other countries are 45% in Germany and 49% in Canada.
The authors demonstrate a close correlation between academic achievement and economic growth of many countries around the world.  The highest academic achievers, such as South Korea, Taiwan, Singapore and Hong Kong, also have the highest growth rates.
Over the past 50 years, from 1960 – 2009, the U.S. economy has grown 2/3 of a percent faster than would be predicted by our mediocre test scores.  But our relative economic advantages, such as open markets, secure property rights, universal K-12 education and favorable immigration policy, are now declining as other countries adopt these same successful social and economic practices.  In other words, we need to do better if we want to remain on top.
The authors make a good case that America’s GDP growth rate would be boosted by ¾ of a percent per year if we were able to match the educational attainment level of Canadian students (49% math proficiency vs 32%).
In their recent book, “Endangering Prosperity, a Global View of the American School,” the authors break down the overall math proficiency score by racial group:  the white proficiency rate is 41.8%, the African American rate is 11.0% and the Hispanic rate is 15.4%.  In other words, almost 2/3 of the American-Canadian math proficiency gap can be explained by the poor performance of American minority groups.
Conclusion: let’s definitely try to improve American K-12 education overall.  But in working on this difficult problem, we should concentrate on measures which will have the most impact on minority groups where the problem is greatest.  For example, providing early childhood education for all low income families will do more to raise academic achievement overall than adopting the Common Core curriculum (which will mostly benefit already high achieving students).

The College Education Bubble

Posted on by
Reply

 

A recent article in the Wall Street Journal by the expert on the economics of higher education, Richard Vedder, “The Real Reason College Costs So Much”, points out the similarities between the government’s higher education and housing policies.  “In housing we had artificially low interest rates.  The government encouraged people with low qualifications to buy a house.  Today we have low interest rates on student loans.  The government is encouraging kids to go to college who are unqualified just as it encouraged people to buy a house who are unqualified.”
The federal government is now spending $105 billion on student loans each year.  The average student loan debt is $26,000 but goes much higher for millions of students.  The maximum annual Pell Grant (intended for low income students) is now $5350 and 20% of the recipients come from families making over $60,000 per year.
President Obama suggests capping monthly loan repayments at 10% of discretionary income and forgiving outstanding balances after 20 years.  This creates a moral hazard.  It signals to current and future loan borrowers that they don’t have to take loan repayment very seriously.  It encourages students to major in “soft” academic areas which have poorer job prospects rather than “hard” areas like engineering and technology which have good job prospects.
Innovation in higher education is not coming from government programs but from private initiatives such as massively open online courses (MOOCs).  These have the potential to greatly reduce college costs.  Community colleges have rapidly growing enrollments and prepare students for skilled jobs in high demand areas such as truck driving, machine technology and health careers.
The cost of higher education is going up much faster than the rate of inflation and the infusion of federal money is making the situation worse by encouraging students to take on excessive amounts of debt.  A cap should be placed on the amount of government money which can be borrowed by an individual student.  There are plenty of low cost options available for obtaining postsecondary education and government policy should support, rather than subvert, such common sense options.

How To Do Intelligent Budget Cutting in Washington

Posted on by
Reply

 

The July/August 2013 issue of the Atlantic Magazine has an article “Can Government Play Moneyball?”, by two former budget officials, Peter Orszag (under President Obama) and John Bridgeland (under President Bush), which describes the very careless spending atmosphere in the federal government in recent years.  “Based on our rough calculations”, they write, “less than $1 out of every $100 of government spending is backed by even the most basic evidence that the money is being spent wisely.”  They describe in great detail their efforts to introduce mechanisms to evaluate the performance of social service programs of various types and how difficult this has been to accomplish.
“Since 1990, the federal government has put 11 large social programs, collectively costing taxpayers more than $10 billion a year, through randomized controlled trials, the gold standard of evaluation.  Ten out of the eleven – including Upward Bound and Job Corps – showed “weak or no positive effects on their participants.”  Here’s another example.  “The federal government’s long running after school program, 21st Century Community Learning Centers, has shown no effect on academic outcomes on elementary-school students – and significant increases in school suspensions and incidents requiring other forms of discipline.  The Bush administration tried to reduce funding for the program” but was overruled by Congress.  “Today the program still gets more than $1 billion a year in federal funds.”
Lots of people complain that the sequester is a “dumb” way to cut federal spending.  Of course, it would make far more sense to cut back spending in a rational way by evaluating all programs, keeping the effective ones and eliminating the ineffective ones.  As the sequester takes bigger and bigger across-the-board spending cuts each year for nine more years (it’s a program to cut $1 trillion over ten years), the big spenders in Congress are going to start crying “Uncle”! because their own favorite programs will be effected more and more deeply each year.  Maybe then, hopefully sooner than later, Congress will gain some collective common sense and accept the fact that there is a better way to make the significant budget cuts that are necessary.
Let’s hope so!

Private Health Care Reform is Getting Started!

Posted on by
Reply

 

Yesterday’s Wall Street Journal has a very interesting article, “More Employers Overhaul Health Benefits”, which describes a movement just getting started whereby employers give their employees a fixed sum of money and let them choose their own plan from an online market place.  The idea is that employers will be better able to predict and control their healthcare expenses for employees.  Furthermore, employees will be able to get better value for dollars spent by selecting their own coverage options, deductible amounts, copays, etc.
In fact, in an exchange run by Liazon Corp., which has 60,000 people enrolled, 75% of workers have chosen less expensive plans than they had before, by accepting bigger deductibles and copays, as well as smaller choices of healthcare providers and restrictions such as primary-care gatekeepers.
This is such an appealing approach to private healthcare cost control that the Accenture Management Consulting Company estimates just five years from now there will be 40,000,000 business employees receiving their healthcare benefits in this manner.  This would be a phenomenal development!
The United States spends 18% of GDP on healthcare altogether, both public and private, which is double the amount spent by any other country.  This enormous expense is a major reason why wage growth is stagnant in our country as well as why the costs of public programs like Medicare and Medicaid are so high and contributing to so much government debt.  It is critical for our country to get the rapid increase of healthcare costs under much better control.  That’s why this new movement of employers and employees working together on this critical problem is such a big step in the right direction.
If the estimate by Accenture is anywhere nearly accurate about how fast this new private healthcare selection method will grow, then there will soon be an excellent opportunity for Congress to expand its benefits to the control of Medicare and Medicaid costs as well.  This is very exciting indeed!

The Best Way to Spread the Wealth

Posted on by
Reply

 

In today’s Wall Street Journal, Stephen Moore discusses how “Obama’s Economy Hits His Voters Hardest.”  A  report by Sentier Research shows that the average American household income has fallen from $54,478 in June 2009 (when the recession ended) to $52,098 in June 2013, amounting to a decline of 4.4%.
Mr. Moore notes that in the 2012 election, won by Barack Obama with 51% of the vote, the President received 60% of the youth vote, 67% of single women, 93% of black, 73% of Hispanics, and 64% of those without a high school diploma.
But, according to Sentier Research, it is precisely these groups for which income has fallen the most during the last four years.  Those under age 25 experienced an income decline of 9.6%, single women’s income dropped 7%, black heads of household’s incomes dropped 10.9%, Hispanic’s by 4.5%, and those without a high school diploma by 6.9%.
On the other hand, during the period 1981 – 2008, often referred to as the Great Moderation, income for black women was up by 81%, followed by white women up 67%, black men up 31% and, finally, white men up only 8%.  In other words, income inequality shrunk dramatically during the Reagan-Bush-Clinton-Bush years and has increased significantly during the Obama years.
The lesson is that in order to spread the wealth it is first necessary to create more wealth.  If more people were working today, and the economy was growing faster, then the people at the bottom of the income scale would be doing much better and gaining on everyone else.  There are tried and true methods to get this done!  It’s exasperating that we aren’t using them!

The Best Way to Help Working People

Posted on by
Reply

 

The lead story in today’s Omaha World Herald, “Demand for skilled labor rising”, along with an accompanying editorial, point out that “Ours is a place where opportunity exists, to the tune of 35,000 advertised job openings counted by the Nebraska Department of Labor.”
Terry Moore, President of the Omaha Federation of Labor, predicts that demand for construction workers will only increase in the near future.
Gary Kelly, Business Manager for Local 22 of the International Brotherhood of Electrical Workers, said “It’s times of full employment that allow us to go out and organize the unorganized.”
Kirk Ahrends, Dean of Applied Technology at Metropolitan Community College, said that instructors who teach 16 different trade professions get many requests for job candidates.  “They’re knocking on the door.  Not only the students, but the industries.  They’re saying ‘Get us some graduates.’”
Nebraska is fortunate to have such a good job market, much better than the U.S. as a whole which is suffering from an unemployment rate of 7.4% and an anemic growth rate of just 2% a year.
By far the best thing the government can do to help workers is to adopt policies which will speed up economic growth.  This can be accomplished by giving entrepreneurs and investors greater incentives to take more risks.  Lowering tax rates (offset by closing loopholes) and easing burdensome regulations are the tried and true methods of getting this done.
There are twenty million unemployed and underemployed Americans who would benefit from national leaders more attuned to their need for work.

What Is the Best Way to Advance Martin Luther King’s Dream?

Posted on by
Reply

 

In Wednesday’s Wall Street Journal John McWhorter, an African-American professor at Columbia University, describes “A Better Way to Honor Dr. King’s Dream”. Mr. McWhorter writes that a new conversation about race, “one in which whites submit to a lesson from blacks about so-called institutional racism” is not what America needs.  “Today’s struggle should focus on three priorities.  First, the war on drugs, a policy that unnecessarily tears apart black families and neighborhoods.  Second, community colleges and vocational education, which are invaluable in helping black Americans get ahead.  And third, the AIDS and obesity epidemics, which are ravaging black communities.”
Such sentiments represent a huge dose of common sense.  The African-American community needs help and cooperation from the wider society to address fundamental issues like juvenile delinquency, poor educational outcomes and unhealthy environments.  But these things, as much as they’re needed, are not enough by themselves for further progress towards racial equality.
The route out of poverty for all low income people, including blacks, is to raise themselves up by their bootstraps through educational attainment and hard work.  Society can and should make sure that the appropriate institutions, such as community colleges, are readily available to provide training for jobs which are out there in the private sector.
But most of all we need a vibrant economy to give lower income Americans more opportunities to work their way up the economic ladder.  We have not yet recovered in a satisfactory manner from the Great Recession which ended in June 2009.  This makes it all the more important for our national leaders to focus on the pro-growth policies which will get our economy humming again.

Education Reform Is Speeding Up

Posted on by
Reply

 

A front page article in yesterday’s Wall Street Journal, “Biggest Changes in a Decade Greet Students in Classroom”, discusses many new and recent developments in K-12 education.  The controversial Common Core, with tougher math and reading standards, has been adopted by 45 states.  A total of 41 states have agreed to link teacher evaluations to test scores or other student achievement measures and 15 states use, or plan to use, an A – F grading scale to rate schools.  Last year there were 5997 charter schools, up from 2559 during the 2002-2003 school year.
What all of this means is that states are hotbeds of educational experimentation.  Meanwhile Congress is trying to figure out how to replace the unpopular No Child Left Behind law which was enacted in 2002 and has been renewed on a year by year basis since it expired in 2007.  Both the Senate and the House are currently considering legislation to give individual states more flexibility in figuring out how to increase educational success.
The fiscal implications of this whole movement of educational reform and decentralization are huge.  The U.S. Department of Education has over 100 separate programs for K-12 education alone, involving massive duplication and inefficiency, with a combined budget of $100 billion per year.  A smaller total amount of money could be given directly to the states in the form of block grants devoted to education.  The states are able to spend the money more effectively than the federal DoE and at less total cost.  Conclusion: better results for significantly less money.
This helps reduce the deficit!