I am a candidate in the Nebraska Republican Primary for U.S. Senate against the incumbent Deb Fischer because she is ignoring out enormous and out-of-control national debt. In fact she has voted twice recently to make the debt much worse than it is already.
In my last post I made the case that debt is by far the biggest long term problem facing our country and that it will be a huge burden on future generations, starting with the millennials.
A new report from the Congressional Budget Office shows just how bad the problem really is:
To just stabilize our debt at the current level of 78% of GDP (for the public part on which we pay interest) will take a savings of at least $5.4 trillion over the next ten years. To achieve even this modest goal would require reducing annual deficits by roughly 50%.
To balance the budget by 2028 (allowing ten years to accomplish this) would take a savings of least $7 trillion over the next decade. This would mean reducing annual deficits by $700 billion per year on average, an extremely difficult task.
Such numbers as these show how frightfully serious our fiscal situation is. Our national leaders should be working hard to focus the country’s attention on this awful problem and how we are going to address it. Instead they won’t even come together to negotiate sensible annual budgets.
Conclusion. How will our debt problem be resolved? Will it take a new crisis to wake up the country to our extremely dire fiscal situation? I prefer to be optimistic and hope for sensible action to head off a new crisis. But there is absolutely no guarantee that common sense will prevail.
Americans are a very fortunate people. We are protected by two oceans and friendly neighbors to our north and south. We are the strongest country in the world, both economically and militarily. We provide the world with cutting edge leadership in many areas such as technology, finance, energy production, scientific research and university education.
In short we live in a very successful, prosperous and complex society. We do have serious problems but they are being addressed by our elaborate legal and governmental processes and structures. Slowly but surely life in America is getting better and better all the time.
Given our country’s size, complexity and dominance in the world, it is inevitable that government will also grow in size and structure in order to take on new responsibilities. It is completely unrealistic to think that we can return to a more limited form of government that existed in the past.
When I say, then, that I’m a fiscal conservative, I am not advocating for less government but merely that we pay for the government that we have, in other words, act in a fiscally responsible manner.
And we are not doing this at the present time:
Our national debt, now 77% of GDP (for the public debt on which we pay interest), is the highest since right after WWII. It is predicted by the Congressional Budget Office that it will keep steadily getting worse without major changes in current policy.
The urgency of the debt problem is based on the fact that interest rates are now so low that it is almost “free” money. But interest rates will inevitably return to more normal historical levels and, when this happens, interest payments on the debt will skyrocket. Eventually this will lead to a Fiscal Crisis, much worse than the Financial Crisis of 2008.
The solution to this problem need not be drastic. Federal spending is growing by 5% per year while tax revenues are growing by 3% per year. If we would just hold spending increases down to 2.5% per year, the federal budget would be balanced in a few years and our debt would start shrinking as a percentage of GDP.
Conclusion. Spending restraint, with very few actual spending cuts, is all that it will take to put our debt problem on a path to solution. Surely we are capable of acting in a fiscally responsible manner like this!
My last post, “The Major Challenges Facing the United States,” came to the conclusion that, while the U.S. has many big problems to address, our national debt is the biggest problem of all, because it will be so hard to deal with through the political process.
Our total national debt is now $19.9 trillion. The so-called public debt, on which we pay interest, is $15 trillion, or 77% of GDP, the highest it has been since right after WWII. Furthermore it is predicted by the Congressional Budget Office to keep getting steadily worse, reaching 90% of GDP by 2025 and 150% of GDP by 2047 unless current policy is substantially changed.
Right now our debt is almost “free” money since interest rates are so low. But when interest rates return to more normal levels, interest payments on the debt will skyrocket by hundreds of billions of dollars per year, likely leading to a new fiscal crisis, much worse than the Financial Crisis of 2008.
The only sane solution to this humongous problem is to start shrinking our annual deficits, this year at about $685 billion, down close to zero over a period of several years. This will require a painful combination of spending curtailments and perhaps some tax increases as well.
One possible way to accomplish this herculean task has been laid out by Barron’s economic journalist Gene Epstein, see here and here. Mr. Epstein’s plan would balance the budget in ten years by decreasing projected spending by $8.6 trillion, with 60% of spending curtailments coming from the entitlement programs of Social Security, Medicare and Medicaid and the rest from both military and domestic discretionary programs.
It needs to be strongly emphasized that under the Epstein plan spending would not actually decrease from one year to the next, but would rather grow at a slower rate, from $3.9 trillion in 2016 to $4.7 trillion in 2026. His plan would decrease the public debt from 77% of GDP today to 58% in 2026.
Conclusion. The U.S. faces the very unpleasant problem of excessive debt which will just keep getting worse and worse without making some relatively unpleasant adjustments in the way that the federal government spends money. The sooner we get started in this process the better off we will be.
Most of the controversy generated by the healthcare bill passed by the House, and the one now being considered by the Senate, concerns the way Medicaid is funded. The current system whereby states are reimbursed by the federal government for a percentage (national average 53%) of their Medicaid expenses would be replaced by putting the federal contribution on a strict per-capita basis, indexed to the annual rate of inflation.
Medicaid is a vast program now serving 73 million low-income and disabled Americans and is doing a good job especially for the elderly and the disabled with special needs. But it costs the federal government nearly $400 billion per year and the cost is growing rapidly. It is essential to get open-ended Medicaid spending under much better control and one good way to do this is to put the federal contribution on a fixed budget.
The Congressional Budget Office has just issued its latest Budget and Economic Outlook report. It shows the ever-worsening fiscal condition for the U.S., unless current policy is changed.
The deficit for 2017 is predicted to be $693 billion or 3.6% of GDP.
Deficits will grow dramatically over the next decade with trillion dollar deficits returning by 2022.
Debt held by the public (on which interest is paid) will grow by $11.2 trillion between now and 2027, from $14.3 trillion today.
Spending will grow from 20.9 percent of GDP in 2016 to 23.6 percent in 2027, while revenues will rise from 17.8 percent in 2016 to 18.4 percent by 2027.
The vast majority of spending growth over the next decade (83%) is the result of rising costs for health care, Social Security, and interest on the debt.
Conclusion. The national debt is growing much too fast. The only way to turn this dangerous situation around is to reform all entitlement programs, including Medicaid, to get their costs under much better control.
The House of Representatives, after much struggle, was finally able to pass a healthcare bill, The American Health Care Act. Now it’s the Senate’s turn to pass its own version and it, too, is turning out to be a struggle.
The healthcare policy expert, Avik Roy, considers the Senate bill to be a huge step forward:
Medicaid is finally put on a budget with annual increases in spending, starting in 2025, tied to the overall rate of inflation. In return, states will gain substantial latitude to use funds more effectively and efficiently.
Tax Credits in the Senate bill are means adjusted and will also encourage younger people to enroll for coverage. This is an improvement over the AHCA.
Expanded coverage. Mr. Roy predicts that passage of the Senate bill would increase (not decrease as the CBO predicts) the number of Americans with health insurance five years from now. This will result because the near poor in states like Texas and Florida, which have not expanded Medicaid, will be eligible for the new means-tested tax credits.
The 10th Amendment is strengthened because so much more authority for regulating healthcare insurance is transferred to the states. This represents huge progress because states are so much more fiscally responsible than the federal government (they have to balance their budgets)!
Conclusion. There are certainly many imperfections in the Senate bill. It does nothing to limit tax credits for employer-sponsored insurance. This is sorely needed to put the overall cost of American healthcare on a sustainable course. It does nothing to help low income people who struggle with high deductibles (for example, by helping to set up Health Savings Accounts). It also does nothing to rein in the cost of Medicare, such as by introducing means adjusted premiums and allowing Medicare to negotiate lower drug prices.
Nevertheless it is a huge step forward in controlling excessive healthcare costs as well as expanding health insurance coverage to more Americans in a fiscally responsible way.
Both President Trump and the Republican Congress want the economy to grow faster than the slow 2% growth which we have experienced since the Great Recession ended in June 2009. The Congressional Budget Office predicts (see chart below) that growth will average just 1.8% over the next ten years under current policy.
Immigration reform, .3%, by increasing the number of workers.
Tax reform, .18%, if well designed. However, deficit-financed tax reform would ultimately harm growth.
Increase the Social Security retirement age by two years, .15%, by keeping people in the workforce longer.
Reduce deficits by $4 trillion over ten years, .1%. This is enough deficit reduction to put our debt on a sustainable, downward path.
Continue expanding energy production at the shale boom level, .09%.
Repeal of the Affordable Care Act, .08%, will keep more people in the workforce.
Ratifying the Trans Pacific Partnership, .01%, by increasing foreign trade.
Increasing public investment in infrastructure, education and research by $40 billion per year, .1%.
Note that all of these changes would increase growth by an estimated .83% of GDP per year. Added to the 1.8% base this yields a growth rate of 2.63%. Unfortunately, many of these reforms are unlikely to occur. On the other hand, various deregulatory actions being taken by the Trump administration are likely to increase growth by an unknown amount.
Conclusion. It is reasonable to anticipate that growth can and will be speeded up to about 2.5% of GDP per year under the Trump administration. Along with the tight labor market now developing (current unemployment rate of 4.4%), blue-collar and other middle class workers should continue to receive decent pay increases for the foreseeable future.
So declared Douglas Holtz-Eakin, former director of the Congressional Budget Office, in March 2011. At the time, federal debt held by the public (on which we pay interest) stood at 63% of GDP. Now, just six years later, that ratio stands at 77% and is projected by the CBO to reach 150% by 2047 if current laws remain unchanged.
The CBO has just released its latest (March 2017) report and the debt situation continues to get worse:
The interest rate on federal debt has averaged 5.8% over the past 60 years. It is now at an unusually low 2% and the CBO projects that it will climb no higher than 4.4% by 2047. Even with such a conservative projection, the total cost of servicing the debt will rise to almost 1/3 of federal revenue by 2047, compared with just 8% today.
Here are some of the dire consequences of such a large and growing debt:
Reduces national savings and income in the long term because more of people’s savings would be used to buy Treasury securities, thus crowding out private investment.
Increases the government’s interest costs and thus makes it much more difficult to lower deficits.
Reduces the ability to respond to unforeseen events. For example, when the Financial Crisis hit in 2008, public debt stood at 40% of GDP and lawmakers had the flexibility to respond to the crisis with both TARP and a fiscal stimulus. Such costly actions will be much more difficult next time.
Increases the chances of a new fiscal crisis if investors become less willing to finance more federal borrowing or demand higher interest rates in return.
Conclusion. The more debt that accumulates and the higher interest rates rise, the more painful it will become to implement a solution. What is really scary is that nothing will be done until a new crisis occurs. Then we will be forced to act and it will be very painful indeed.
The Congressional Budget Office has just released its analysis of the GOP Healthcare Reform Bill, the American Health Care Act, designed to replace the Affordable Care Act. The Committee for a Responsible Federal Budget has summarized its main features as follows:
The AHCA would reduce federal deficits by $337 billion over the next ten years.
CBO estimates that there would be 24 million fewer Americans with health insurance under the AHCA as compared with the ACA by 2026, with 14 million fewer Medicaid beneficiaries (see the above chart). The decrease in individuals with employer coverage would result from dropping the employer mandate. The decrease in individual coverages would result from smaller subsidies under the AHCA.
I have previously summarized the AHCA pointing out its strengths and weaknesses:
Strengths: discards mandates, fewer regulations, turns Medicaid into block grant program to states.
Weakness: huge discrepancy between lavish tax treatment of employer-paid care (no upper limit on tax exemption) and much stingier tax credits for individuals
The U.S. now spends 18% of GDP on healthcare, both public and private, almost twice as much as any other developed country. Such high costs are a big drain on government revenue as well as a drag on economic growth. The AHCA should take a much bigger step towards controlling the cost of healthcare. Block granting Medicaid to the states, and giving the states more flexibility in implementation, definitely helps, but it is not enough.
But basic fairness as well as fiscal responsibility requires a major cutback in the tax exemption for employer provided care. This is essentially a subsidy to employees. It should have no greater value than the refundable tax credit provided to individuals who purchase health insurance on their own.
Conclusion. A free market healthcare system allows more individual choice and delivers more medical innovation. But our current system is too expensive to be sustainable for much longer. Either the GOP fixes this problem or a single-payer system will be the inevitable result.
As I discussed in my last post, Donald Trump’s primary mandate from the presidential election is to get the economy growing faster in order to help out his base of blue-collar workers who have suffered wage stagnation for many years and especially since the end of the Great Recession in June 2009. The tax and regulatory reform needed to accomplish this urgent task will undoubtedly turn out to be the first plank of Trumponomics.
But there is another equally urgent task which must not be overlooked by the incoming Trump Administration. Our national debt, the public part on which we pay interest, is now 75% of GDP, the highest level since the end of WWII, and projected by the nonpartisan Congressional Budget Office to keep growing rapidly in the years just ahead (see chart above).
As Barron’s has pointed out, “Saving America, Part 1”, in its current issue:
Today’s public debt of $14 trillion will grow to $45 trillion in just 20 years’ time on the basis of current entitlement programs like Medicare and Medicaid, without any new spending programs or tax cuts.
The annual interest on a $45 trillion debt load would be about $750 billion at today’s super low interest rates. If interest rates rise to more typical levels, the interest payment on this level of debt would be about $1.5 trillion a year. This represents almost half of all federal spending during the current 2016-2017 budget year.
Conclusion. Such a high level of interest payment on our debt is unthinkable. This means that either we make fundamental reforms in government entitlement programs in the next few years or else we will have a severe fiscal crisis on our hands in less than twenty years’ time. We have some stark choices to make and hopefully the incoming Trump Administration will not shy away from what needs to be done.
My last post is highly critical of the economist and New York Times columnist, Paul Krugman, for encouraging massive new deficit spending to stimulate our under-performing economy.
Debt and the slow growth of our economy are the two main topics of this blog which I have now been writing for almost four years. How to speed up growth is a complicated and highly charged political issue about which reasonable and well informed people can differ. However avoiding excessive debt is to me a moral issue whose resolution should not be that difficult, at least in a conceptual sense. I have often used the above chart from the Congressional Budget Office to illustrate our debt problem because it clarifies the problem so vividly. Here are its main features:
Our public debt (on which we pay interest), now about $13 trillion, is 75% of GDP, the highest since right after the end of WWII. And it is projected to keep getting steadily worse under current policy.
Note the decline in the debt from the end of WWII until about 1980. This doesn’t mean that the debt was actually paid off but rather that it shrank as a percentage of GDP as the economy grew fairly rapidly during this time period.
From 1980 – 2008 the debt level fluctuated and increased somewhat but did not get badly out of control.
Debt shot up rapidly with the Great Recession and has been continuing to grow ever since.
The current GDP of our economy is about $19 trillion. At a current growth rate of 2.1%, this adds $400 billion of GDP per year. This means that a $400 billion deficit for 2016 would stabilize the public debt at 75% of GDP. But our 2016-2017 deficit is projected to be almost $600 billion (and rising). This is not good enough!
Conclusion. In order to begin to shrink the size of the public debt, it is imperative that annual spending deficits be reduced to well below $400 billion per year. This will be difficult for our political process to achieve but it is the only way to avoid a new and much worse financial crisis in the relatively near future.