Tag Archives: congress

Whither the American Economy?

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Paul Krugman, writing in today’s New York Times, ”The Story of our Time”, says that “this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again”.  On the other hand, Bill McNabb, the Chairman and CEO of the Vanguard Group, writing in today’s Wall Street Journal, “Uncertainty is the Enemy of Recovery”, says that “there is…most significantly, uncertainty about U.S. fiscal policy and the national debt.  Until a sensible plan is created to address the debt, America will not fulfill its economic potential”.
So there you have it, our country’s two premier outlets for news and opinion putting forward contrasting views of what needs to be done to restore vitality to the world’s leading economy.  Do we ramp up government spending indefinitely in order to increase demand, paying little if any attention to the size of the national debt, until hopefully, before too long, private industry is willing to increase spending and investing for the future?  Or do we instead concentrate on establishing those policies which will directly and immediately give business leaders confidence that political leaders are willing to make the tough decisions needed to get our fiscal house in order?
This question is indeed the story of our time.  Getting the answer right will determine our country’s (and the whole world’s) fate for many years to come.

Are Low Interest Rates Hurting the Economy?

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The former Chairwoman of the Federal Deposit Insurance Corporation, Sheila Bair, has recently stated that “Low interest rates are hurting, not helping, the economy”.  According to Ms. Bair, historically low interest rates have helped the housing market recover but are hindering business lending, which holds the key to the overall recovery.  “Very low interest rates on your (the banks) balance sheet … is not good for business lending”, says Bair.  She would like the Fed to start increasing rates in a gradual and methodical manner so that the market can adjust.
Even the WSJ’s conventional economics columnist, David Wessel, admits that “big companies continue to build an enormous cash hoard as if they are preparing for catastrophe”.  He says that “Ben Bernanke sees the exit, he just doesn’t know how to get there”.
Current policies for fixing the economy are clearly not working and may be doing grave damage.  There are lots of policy measures which might help, and certainly won’t hurt, such as broad-based tax reform, loosening regulation of small business, aggressively pursuing new trade agreements, visa reform, targeted job training, etc..  Concentrating on implementing such measures is what our national leaders should be doing!

Is Faster Growth Under Our Control?

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In today’s Wall Street Journal, columnist David Wessel declares that “Faster growth relies on a bump free road”.  Mr. Wessel cites a new forecast from the International Monetary Fund that sees a “three speed recovery” with the U.S. lagging behind emerging markets and developing economies but doing much better than the no-growth Euro zone.  According to Mr. Wessel our own economic growth is so closely tied in with the rest of the world, and especially Europe’s floundering economy, that the best we can do is to avoid “overly strong deficit reduction” and hope that there are no major bumps in the road.
It is pessimistic indeed to assume that there is little if anything we can do to boost economic output.  We can lower both individual and corporate tax rates, offset by eliminating deductions and closing loopholes, in order to stimulate more private investment.  We can help small businesses grow by removing the huge burden of having to provide health insurance to their employees (this can be accomplished by changing the tax treatment of health care insurance).  We can encourage more entrepreneurial activity with targeted (but temporary) tax exemptions. Immigration reform, hopefully now in the works, will boost the productivity of our 11,000,000 illegal immigrants by giving them more economic freedom.
Twenty million U.S. citizens are either unemployed or underemployed.  Our national leaders should consider it to be their moral duty to adopt measures to put more of them back to productive employment.  In addition, as the strongest economy in the world by far, we will boost the entire world economy if we can speed up our own growth.  The benefits of faster growth are so obvious that it should be the first priority of Congress and the President to work together to get this done!

How Can American Health Care be Reformed?

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The total cost of health care in the United States is roughly 18% of Gross Domestic Product, almost twice as much as for any other country in the world.  It is common knowledge that health care entitlements such as Medicare and Medicaid are huge budget busters for the federal government and are a big reason why it is so difficult to get government spending deficits under control.  But the cost of private health care is also increasing rapidly and is a big contributor to the stagnation of middle class income in recent years.  In other words, the exorbitant cost of health care has a negative effect on the entire American standard of living and the problem is just getting worse and worse.
Everyone who is concerned about this problem should read David Goldhill’s new book: “Catastrophic Care:  How American Health Care Killed my Father – And How We Can Fix It” and can start with his article in the September 2009 issue of the Atlantic Monthly. He has an approach which should appeal to liberals and conservatives alike.  All American citizens would be covered from cradle to grave but “health care is fundamentally best left to the market to maximize innovation, quality and efficiency”.  The basic principle is that insurance would only be used to cover real risk rather than the certainties of life such as routine illness and the infirmities of old age.
This ideal is accomplished with a “Balanced Health System: health accounts, health loans, and catastrophic insurance with a very high deductible”.  Of course it will be complicated to switch over an entire health care system to a new operating framework.  Of course there are thousands of details to work out.  Of course there will be strong criticism of any such concrete recommendation for radical change.
The point is that our current system is unsustainable.  Do we change it in a deliberate, rational manner or do we rather delay until a fiscal crisis of some sort occurs?  It is encouraging that our national leaders are working together on such issues as immigration reform and stricter gun control.  But our economic and fiscal problems are much worse and more urgent than these social issues.  We need leaders who have the vision and capability to move us forward on addressing our most fundamental problems.

The President’s Budget

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The Administration has now released its own budget, “Obama Makes Budget Gamble”  as reported by the Wall Street Journal on Thursday, April 11, 2013.  We now have three budgets to compare with each other, from the House Republicans and the Senate Democrats as well as from the President.  Not surprisingly the President’s budget is very close to the Senate’s for the entire ten year period ahead, both in year-by-year spending totals as well as revenue projections.
The President’s budget shrinks the deficit from 5.3% of GDP for 2013 to 4.4% for 2014 and down to 1.7% in 2023.  But just retaining the sequester level of spending for next year, as the Republicans propose to do, with no other cuts, would lower the deficit level to 3.7% of GDP for next year.  And, of course, the Republicans propose to entirely eliminate the deficit by 2023.  Shrinking the deficit to 1.7% of GDP by 2023, as the Democrats propose to do, sounds good on the face of it, but it means a deficit of over $400 billion still remains ten years out.  Bottom line: both the Administration and Senate budgets increase the debt by about $5 trillion over the next ten years, making no attempt to eliminate the deficit, compared with a Republican increase of $1 trillion in debt by 2023 while finally ending our awful slide into deeper debt.
The President’s budget does have some good features such as changing the way the Consumer Price Index is computed, to make it more accurate, which could save $339 billion over ten years.  The administration suggests additional means testing for Medicare recipients so that the more affluent would pay higher premiums than at present (significant but unknown savings).  Limiting tax deductions for the top 3% of taxpayers to 28% of income would generate $529 billion over ten years.  Taxing all incomes over $1 million at the minimum rate of 30% (The Buffett Rule) would raise an additional $53 billion over ten years.
The problem is that all of these spending cuts and tax increases in the President’s budget would go to new spending rather than deficit reduction.  Tax reform, with a tradeoff between lower rates and fewer deductions, would give a big boost to the economy.  But just raising taxes in order to increase spending neither helps the economy nor lowers the deficit.  The President is again failing to provide leadership on our most critical problems.
The job of providing national leadership on economic and fiscal issues thereby goes by default to the Republican majority in the House.  This is a very big responsibility for John Boehner and company.  But they’re doing a remarkably good job so far under very trying circumstances!

Why Medicare is Such an Enormous and Urgent Fiscal Problem, II

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The National Institute for Health Care Management has just issued a report, “Health Entitlement Spending: A Story in Six Charts”, which describes in great detail why federal health care spending is such an enormous fiscal problem.  First of all, health care spending is already 21% of total federal spending in 2012.  This spending will more than double in the next ten years.  Annual Medicare expenditures are already double the revenue received from the Medicare Part A Payroll Tax and premiums paid by Medicare recipients.  This gap will continue to steadily widen in the coming years because recent retirees will only pay in total a small fraction of their lifetime benefits.
Every year since 2006, the Medicare Trustees have issued a determination of “excess general revenue Medicare funding”.  By law the President must respond by submitting legislation to correct the problem and Congress must likewise respond on an expedited basis.  But no corrective action has been taken so far.
All federal programs should operate efficiently and much can and should be done to achieve greater efficiency across the whole spectrum of federal programs.  But Medicare is the “sine qua non”, (without which, nothing) for spending reform.  Nothing else matters unless we can get Medicare spending under control.
One way would be to raise Medicare Part A taxes for everyone and also raise premiums for well-to-do Medicare recipients.  And then we’d still have to severely restrict Medicare benefits.  This would be drastic action indeed.
Another way is to give (refundable) tax credits to everyone who applies for Medicare and let them find their own insurance coverage on the private market.  This would create a huge incentive for recipients and their families to pay close attention to health care costs.
Each of the above alternatives would bring radical changes to our Medicare system.  But either we act now in a deliberate, and hopefully rational, manner or else our national debt will grow so rapidly that there will be a new fiscal crisis much worse than what happened in 2008.
Which of these three scenarios do we prefer?  Right now we have a choice!

Why Medicare Is Such an Enormous and Urgent Fiscal Problem

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An article in today’s (April 4, 2013) New York Times, “Misperceptions of Benefits Make Trimming Harder”, explains why Medicare is such an enormous and urgent fiscal problem for the federal budget.  The article points out that an average single male who retired in 2010 will receive more than $100,000 in Medicare benefits in excess of what he pays into Medicare in taxes before retirement and premiums while receiving benefits.  The gap is projected to grow for future retirees.  Too many people are not aware of this huge discrepancy between what they pay into Medicare compared to the benefits which they will draw out after retirement.
According to the reporter, Democratic leaders, including the President, are aware of this funding gap but are unwilling to discuss it publicly.  Instead they take the easy way out by criticizing Republicans who do want to address the problem in a responsible manner.
The problem is so serious that trims around the edges, such as means testing and/or higher premiums for affluent retirees, will not accomplish anything more than making a small dent in the funding gap.  Raising taxes will not get the job done either because they would have to go up too much and too often as the problem keeps getting worse and worse.
The only way to really solve the problem is to control the costs of Medicare (and more generally for all of health care).  There are two basic ways to do this.  One way is to have a government run single payer system with very strict rationing.  The other way is to make everyone, including seniors, financially responsible for their own health care, with subsidies for people with low incomes.
The challenge for Republicans is to frame this basic choice as clearly and vividly as possible.  The American people must come to realize that the status quo in health care cannot continue.  If this message can be delivered effectively to the broad public, I am confident that a majority of people will want a free market system with choice rather than severe government rationing.

We Should Take David Stockman Seriously

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In the March 31, 2013 edition of the New York Times David Stockman has an opinion piece entitled “Sundown in America” in which he says that “eight decades of borrowing, spending and money-printing by the government have bankrupted America” and that “these policies have brought America to an end-stage metastasis.  The way out would be so radical that it can’t happen.”
Although he exaggerates and overhypes with vivid language, I believe that he is basically correct about the gravity of our current predicament.  We should take him seriously because many of his proposed solutions are on the right track even if they are unnecessarily extreme.
For example, he berates the House Republicans for giving Social Security and Medicare a ten year pass instead of wanting to reform them right away.  Of course it would be better to reduce benefits to affluent seniors immediately but it will take bipartisan cooperation to accomplish this, and the Democrats are dragging their feet on entitlement reform.
Mr. Stockman’s strongest language is directed at the finance industry.  He wants to rein in the big Wall Street banks by cutting off their access to cheap Federal Reserve loans and deposit insurance.  The Glass-Steagall Act would be reinstated.  The central mission of the Federal Reserve should be restored: “to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy.”
Is our situation as hopeless as Mr. Stockman says?  Interestingly, he provides evidence that we may have turned the corner in the right direction.  His chart “Indebtedness Dwarfs the Economy” shows that total debt owed by government, companies or individuals, as a percentage of GDP, started dropping about three years ago.  What we need to do is make sure that we keep this total debt measure moving steadily downward for the indefinite future.

The Spending Crunch

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In the March 26, 2013 edition of the Wall Street Journal, the nonpartisan columnist Gerald Seib makes a very astute observation, namely that “Liberals Face Spending Dilemma”.  The Republicans are beating the drums for a balanced budget, the economy is growing at the anemic rate of 2% per year and entitlement spending is growing much more rapidly than this.  So what is going to happen?  Discretionary spending is going to have to shrink!   This means a big hit for both defense and nondefense discretionary spending, meaning most of the traditional programs funded by the federal government.
How do we get out of this predicament?  The best way would be to make the economy grow faster but this is unlikely to happen while the Democrats control the executive branch and are unwilling to implement pro-growth policies such as tax reform, deregulation and stepped-up international trade.
But even with more business friendly pro-growth policies, entitlement spending is growing way too fast and eating up a larger and larger piece of tax revenues.  The Republicans want to control the costs of Social Security, Medicare and Medicaid but simply cannot get this done without Democratic cooperation and support.  Either Democrats help figure out how to make significant cost cutting changes to entitlements or else steep cuts in discretionary social spending will have to be made.
The Republican drive to rapidly shrink deficit spending down to zero is for real and will not be denied.  The sooner the big spending liberals figure this out and adjust their behavior, the better off will be the whole country.

Budgeting 101: Don’t Forget Hauser’s Law!

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In 1993 the investment analyst W Kurt Hauser pointed out that “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.”  Hauser’s Law of course is really just an empirical observation which is referred to as a “law” because it has been so amazingly consistent since 1945.  Some economists use Hauser’s Law to argue that there is no sense in raising tax rates because higher rates won’t really raise additional revenue over time.  To the extent which Hauser’s Law is accurate, the only way to significantly increase tax revenue is to grow the economy faster.

However Hauser’s Law is also quite relevant in figuring out how much money the federal government should be spending in a given year.  If revenues are limited to 19.5% on average over time, then overall spending should also be approximately limited to 19.5%, or else there will be a negative balance, i.e. a deficit.  If there is a large imbalance year after year, as during the past few years, then the national debt will grow rapidly and become the huge problem that it is today.

In this respect, take a look at John Taylor’s March 17, 2013 entry in his blog Economics One entitled “An Opportunity to Contrast and Compare Budgets”.  The Republican House Budget rapidly (over two or three years) brings federal spending down below 20% of GDP and then levels it off at about 19.5% after that.  On the other hand, the Democratic Senate Budget brings spending down to about 21.5% in 2017 and then it creeps back up to 22% by 2023.  This is why the House achieves a balanced budget in ten years while the Senate budget doesn’t even come close to achieving balance.

Can there be any question as to which of these two budgets is the more fiscally responsible?  To me it is obvious but if you feel otherwise please do say so in the comment section which follows this entry.