My last two posts, here and here, argue that America’s two most critical problems are:
Speeding up economic growth in order to create more jobs and better paying jobs, especially for middle- and lower-income workers whose wages have been stagnant for the past 15 years.
Getting our large and rapidly growing national debt under control by shrinking annual deficit spending. This will put our debt on a downward path as a percentage of GDP.
Many Facebook comments on these posts inquire about how these goals will be accomplished. If tax reform is the best way to increase economic growth, how can this be done in a way that is fair to the non-wealthy. If spending cuts are necessary to balance the budget, what cuts should be made? Here is a summary of my views on these questions:
Growing the economy with tax reform. The best way to spur investment and business expansion is with the lowest possible tax rates on owners and investors. Broad-based tax reform, with lower tax rates for all, paid for (i.e. in a revenue neutral way) by closing loopholes and shrinking deductions, will accomplish this. The 64% of taxpayers who do not itemize deductions will increase their income with tax rate cuts. Lower tax rates for the affluent will be offset by shrinking deductions and closing loopholes.
The corporate tax rate should also be cut to internationally competitive levels, again paid for by drastically shrinking, if not totally eliminating, all deductions. This way all corporations (including GE!) would pay the same tax rate. And American companies would have much less incentive to move overseas.
Reducing our national debt. We have got to drastically shrink our annual deficits (now running about $500 billion per year) in order to put our national debt on a downward course, as a percentage of GDP. The House Budget Committee has recently passed a plan to balance the budget within ten years. Not everyone will agree with the details, but at least it’s a starting point. An alternative approach is to adopt a Balanced Budget Amendment to the U.S. Constitution. This would require Congress to make tradeoffs annually between either restraining spending or raising taxes. A BBA will force them to do what they should be doing anyway!
will inexorably lead to a breakdown of the Democratic-welfare regime which has lasted from 1932 until the present. The reasoning is very simple and direct. We already have huge debt. Rapidly increasing entitlement spending on our rapidly increasing number of retirees will keep driving our debt higher and higher. We won’t be able to grow our way out from under this debt because we have run out of industrial revolutions to spur new growth. A new study co-written by Doug Elmendorf, CBO Director from 2009-2015, makes the case that our fiscal crisis, although real, is less urgent than often believed for the following reasons:
Lower than expected health-care inflation
The persistence of low interest rates
The above chart shows, for example, that the public debt may not reach 100% of GDP until 2032 instead of the earlier CBO prediction of 2030. I believe that this Elmendorf projection should be viewed as false comfort.
Both health-care inflation and low interest rates are a direct result of very low overall inflation in the U.S. and this will not last forever. Low interest rates mean that interest payments on the debt are also very low. This is a very poor reason to increase current borrowing. When interest rates do go up, whether it is sooner or later, interest payments on the debt will increase by hundreds of billions of dollars a year over a likely relatively short time period.
This is the severe crisis, or Fourth Revolution, which Mr. Piereson is predicting. We don’t know when it will occur because we don’t know when inflation will rear its ugly head.
Wouldn’t it be much better to put our debt on a downward path, as a percentage of GDP, and avoid the otherwise very unpleasant consequences?
The political scientist, James Piereson, categorizes U.S. history, after the founding years, into three primary periods:
A Democratic-expansionist regime from 1800 to 1860 which dissolved in the midst of the slavery and secession crisis.
A Republican-capitalist regime 1860 to 1930, which was ended by the Great Depression.
A Democratic-welfare regime from 1932 until the present, although with faltering support after 1980.
Mr. Piereson makes a persuasive argument that America’s current third regime is in the process of collapsing for three major reasons:
Debt. Our public (on which we pay interest) debt today is $13 trillion or 74% of GDP, the highest since right after the end of WWII, and is continuing to climb.
Demographics. There are over 46 million Americans aged 65 and older today and this number is growing much faster than the overall population. The same for the number of people on Medicare (48 million) and Social Security (58 million). There will soon be only two workers for each retiree. How are we going to pay for the rapidly increasing costs of old age in the U.S.?
Slowing Economic Growth. We know that economic growth has averaged only 2.1% a year since the end of the Great Recession in 2009. The economist Robert Gordon makes a strong argument, here and here, that the rate of economic growth is declining for fundamental reasons which will be very hard to counteract.
There are lots of proposals to reform entitlement programs or to rewrite the tax code to stimulate more economic growth. As Mr. Piereson says, such proposals make sense on paper but they are unlikely to be adopted. “The clearest obstacle to any preemptive solution is the polarization of the two major political parties.” Democrats have moved leftward and Republicans have moved rightward. “Polarization is characteristic of regimes as they begin to tear themselves apart in conflicts which defy resolution within the existing structure of politics.”
Any number of events or developments could throw the system into a terminal crisis which would make it difficult for the U.S. to pay off the many commitments it has made. Such an upheaval would amount to the “fourth revolution” in our nation’s history. A serious prospect indeed!
In my last post, “Annual Deficits are Starting to go Back Up,” I refer to a new report from the Congressional Budget Office to show that it is the large annual increases in federal healthcare spending (Medicare, Medicaid, CHIP and Obamacare) which is the main driver of our annual deficit spending which is going to start increasing again unless we do something serious about it. The basic problem is, as shown by the above chart, that Americans, in general, don’t have enough skin in the healthcare game, i.e. we don’t pay enough of our health care expenses out of our own pockets, and therefore we don’t directly feel the pain of high and rapidly increasing health care costs.
A group of policy experts from the American Enterprise Institute have come up with a practical plan to address this problem. Its elements are:
Retain employer provided coverage. This is how half of Americans get health insurance. The only change would be an upper limit on the tax preference for employer-paid premiums so that only the most expensive plans would exceed it.
Tax Credits. Individuals without employer coverage would get a tax credit with no strings attached to pick any state-approved plan that meets their needs.
Continuous coverage protection. As long as people stay insured, they cannot be denied enrollment based on health status.
Medicaid reform. The federal government would give states fixed, per-person payments based on historical spending patterns. Able bodied adult and their children could combine Medicaid and the (refundable) federal tax credit to enroll in a private insurance option.
Medicare reform. Medicare would provide a fixed level of assistance which seniors would use to purchase a health plan of their own choosing.
Expanded Health Savings Accounts. These are intended to be used with catastrophic insurance with a high deductible. HSAs could be established with a one-time $1000 tax credit and unused funds rolled over from one year to the next.
Such a system does not repeal, but rather improves the Affordable Care Act. It keeps the ACA exchanges and introduces cost controls in a flexible manner, i.e. without mandates. It is the type of system the U.S. needs to get health care costs, and therefore overall deficit spending, under control.
As regular readers of It Does not Add Up know well, I am highly alarmed about the large budget deficits and slow economic growth in the U.S. in recent years. Some people respond that deficits are falling and that we have entered a new era of slow-growth secular stagnation which is unavoidable.
A new report from the Congressional Budget Office, our most reliable source for objective fiscal and economic information, now predicts that the deficit for 2016 will be $544 billion, a large increase over the $439 billion deficit for 2015. Furthermore, CBO predicts that for future years deficits will continue to grow, exceeding $1 trillion by 2022. Here is a summary of the CBO predictions:
Federal outlays are projected to rise by 6% this year, to $3.9 trillion, or 21.2% of GDP. This represents a 7% rise in mandatory (entitlement) spending, a 3% increase in discretionary spending, and a 14% increase in net interest on the national debt.
Under entitlements, Social Security payments will increase by 3% and healthcare (Medicare, Medicaid, CHIP (children’s health) and Obamacare) payments will increase by 11%.
Revenues will increase by 4% in 2016, to $3.4 trillion, or 18.3% of GDP.
Deficits are projected to increase from 74% of GDP in 2015 to 86% of GDP by 2026.
Spending for mandatory programs will increase from 13.1% of GDP in 2016 to 15% of GDP in 2026.
First Conclusion: The spending increases from 2015 to 2016, outlined above, illustrate a clear and alarming trend which is evident in the full ten-year set of CBO data. Discretionary spending will rise but at a sustainable rate of about 3% a year or less. Mandatory (entitlement) spending will rise at a much faster and unsustainable rate. It is healthcare spending, i.e. for Medicare, Medicaid, CHIP and Obamacare, and not Social Security, which is driving the rapid increase in mandatory spending. Second Conclusion: Although it is government healthcare spending which is driving our rapidly worsening deficit and debt problem, this is just part of the larger problem of the rapidly increasing cost of overall (including private) healthcare spending in the U.S. This is the basic problem we need to focus on to get both fiscal and economic policy back on the right track.
I have been writing a lot lately about the need for a Balanced Budget Amendment to the U.S. Constitution. Our public debt (on which we pay interest) is now over $13 trillion and amounts to 74% of GDP. And this percentage, the highest since the end of WWII, is projected by the Congressional Budget Office to keep growing indefinitely. Eventually this will lead to another financial crisis, likely much worse than the one we’re still getting over with. Here is a vivid example of why it’s so hard for Congress to stop spending more each year than is collected in tax revenue. Vice President Joe Biden wants to launch a cancer “moonshot”, in honor of his late son Beau who died from brain cancer in May 2015, by “increasing resources – both public and private – to fight cancer.” This is an apparently attractive but actually poor idea for the following reasons:
The annual budget for the National Institutes of Health, which fund medical research, has already been increased by $2 billion for the current 2016 budget year.
Major advances in immunotherapy are enabling oncologists to target the surface of cancerous cells instead of using chemotherapy that affects the whole body. But these targeted therapies routinely cost over $100,000 a year per patient.
Everyone would like to speed up the war on cancer. But we’re already spending billions of dollars a year on it and cancer researchers are making steady advances. In other words, we should leave well enough alone on the cancer front and focus on a much more fundamental problem which is already severe.
I am referring, of course, to our excessively large and rapidly growing national debt. Right now interest rates are at historic lows and so our debt is almost “free money”. But this is already starting to change and soon interest payments on the debt will be eating us alive. We’re already in a deep hole but at least we can stop making it any deeper than it already is.
This is exactly what a Balanced Budget Amendment will accomplish.
Ever since the end of World War II the strength of the United States has guaranteed world order and stability. As Americans we are especially fortunate to live in such a strong, free and prosperous nation. But our future wellbeing depends on the soundness of our economy and the integrity of our financial system. This includes being able to pay our country’s debts in any circumstances.
The public debt (on which we pay interest) is now 74% of GDP, the highest it has been since the end of WWII. The Congressional Budget Office, our most objective and nonpartisan source for fiscal and budget information, predicts that the debt will continue to rise indefinitely, presumably until we have another financial crisis, which is likely to be much worse than the Great Recession of 2008-09. It is almost impossible for Congress to address our debt problem effectively. Democrats want to spend more money while Republicans want to avoid raising taxes. The wishes of both can be satisfied only by increasing deficit spending and therefore borrowing more money. Right now this practice is pain free because interest rates are so low.
But this situation will not last forever and is, in fact, already starting to change. The Federal Reserve raised short term interest rates by .25% in December 2015 which raises interest payments on the $13 trillion public debt by $33 billion per year. Warding off inflation will require many more such rate increases in the future.
The only way to force Congress to act on this problem is with a Balanced Budget Amendment to the U.S. Constitution. 27 States (out of a required 34) have called for a Constitutional Convention to propose a BBA. As more states are added to the list, Congress may decide to propose a BBA on its own.
I have discussed previously how to make a BBA both effective and flexible enough to handle emergencies. It is likely that the proponents of a BBA would draft it carefully because it would have to be ratified by 38 states in order to take effect.
This is the best argument I can make for a BBA. I will now move on to other topics!
I have made the case in several recent posts, here, here, and here, as to why we need a Balanced Budget Amendment to the U.S. Constitution. This is a very timely issue since 27 states (out of the 34 required) have now called for a Constitutional Convention to propose such an amendment.
Many people have pointed out the difficulty of creating such an amendment which would be both effective enough to get the job done as well as flexible enough to allow for any emergencies which might arise. Here are some suggestions for the main features which are needed:
Prior to the beginning of each fiscal year, the President is required to submit a proposed budget for the U.S. Government in which total outlays do not exceed total receipts.
Congress need not adopt the President’s proposed budget but is likewise required to adopt a balanced budget for the coming fiscal year.
A two-thirds vote of each House of Congress is required to approve an excess of outlays over receipts, either for the entire budget or for supplemental spending once the fiscal year has begun. (Many proposed amendments require only three-fifths majorities for override but I think that this is insufficient.)
Congress may pass appropriate legislation to implement and enforce this amendment. For example, official estimates of receipts and outlays could be provided by the Congressional Budget Office.
The BBA amendment takes effect beginning with the fifth fiscal year following its ratification. (The idea here is to provide Congress with a sufficient time window to whittle down our current deficit spending, approximately $450 billion, to a more manageable amount, before the strict limits of the BBA take effect.)
Keep in mind that the real purpose of a BBA is not to establish exact numerical balance for the budget but to put our national debt on an overall downward course as a percentage of GDP. Occasional spending overrides during the budget year, as long as they are reasonable, will not detract from this goal. A two-thirds majority vote for balance overrides should be sufficient to accomplish this.
I have been writing this blog, “It Does Not Add Up” for three years now. It deals with fiscal and economic policy at the national level. Of the many problems in this area, there is one which looms larger than all the others. It is our out-of-control annual deficit spending which is in turn leading to a rapidly exploding national debt, now roughly $13 trillion or 74% of GDP. My last post considers the details of the recently passed 2016 Federal Budget and how it will add $158 billion to the deficit in just 2016 alone. The Committee for a Responsible Federal Budget estimates that the 10 year total in additional debt will be about $1.7 trillion.
As the above chart shows, such a huge additional debt in just ten years will lead to a total public debt in 2040 equal to 175% of GDP. Such an enormous debt is obviously unsustainable and will almost surely lead to a new, and much worse, financial crisis long before the year 2040 arrives.
As the chart also shows, we need to be moving in exactly the opposite situation to keep our debt under any semblance of control. Reducing deficit spending by $2 trillion over the next ten years would serve to “stabilize” the debt at 72% of GDP in 2025.
To actually end deficit spending, and therefore balance the budget, would require reducing the deficit by a total of $5 trillion over ten years. This is exactly what the Republican Budget Resolution from Spring 2015 proposed to do. Needless to say, this desirable goal has fallen by the wayside.
The Republicans are promising a fresh start and better process next year. We can only hope that they are more successful in the new year.
Congress is facing two critical fiscal deadlines in the very near future. Our current debt ceiling of $18.1 trillion will be exceeded by November 4. A temporary 2016 budget was passed that will fund the federal government at its current level through December 11. There is much pressure on Congress to lift the sequester limits for discretionary spending which have been in effect since early in 2013. The Republican majorities in Congress should use their leverage to promote fiscal responsibility in the following way:
Extend the debt ceiling by $1 trillion or enough to last about two years at our current rate of deficit spending. Control over the debt ceiling gives Congress an important tool with which to remind the voters of the urgency of shrinking the national debt. Make it clear that in return for supporting payment of existing obligations, Republicans will insist on far more spending restraint in the future.
For example, Congress should agree to only additional short term extensions of this year’s budget at current spending levels, including sequester limits, until a long-term budget plan is locked into place along the lines of:
The ten year budget plan adopted by Congress last Spring produces a balanced budget by 2025. Perhaps surprising to many people, it still allows spending to increase by 3.3% annually which is approximately double the current rate of inflation.
Such a plan of indefinite short term budget extensions at current levels will get the focused attention of all big spenders including conservatives who want more military spending as well as the President and his Democratic allies in Congress. Everything should be on the table: entitlement reform, tax reform, immigration reform, etc. There need be no deadline for agreement; the current budget could simply be renewed at short term intervals until a mutually acceptable plan was achieved. No plan, then no budget increases. Take your pick. Conclusion: a national debt of 74% of GDP is in fact a fiscal crisis and the Republicans have enough leverage to force a showdown in a sensible way. They should use it!