The Slow Growth Economy We’re Stuck In

Posted on August 26, 2015 by jackheidel

We have very high debt and Paul Krugman says in “Debt Is Good” that we need more! The Congressional Budget Office’s latest report this week, “An Update to the Budget and Economic Outlook: 2015 – 2025” predicts slow economic growth for the next ten years, averaging 2.1% per year (see chart below).
Unfortunately, high debt and slow growth are a deadly, self-reinforcing, combination. Today’s Wall Street Journal has a chart (pictured below) showing clearly how budget deficits are likely to increase over the next ten years. The public debt (on which we pay interest) is predicted to grow from 74% of GDP today to 77% of GDP in 2025, increasing by a total of $7 trillion over this time period.
Here is another connection between slow growth and high debt:

Slow Growth means higher than necessary unemployment and under-employment as well as minimal raises for employed workers. The resulting economic slack leads to
Low Inflation. But low inflation means that the Federal Reserve can maintain
Low Interest Rates to try to encourage more borrowing to stimulate the economy. This means, in turn, that Congress can run up huge deficits without having to pay much interest on this almost “free” money. This eventually leads to:
Massive Debt. But what happens when inflation does take off, which has happened before and is likely to happen again? Then the Federal Reserve is forced to raise interest rates quickly and we are stuck with huge interest payments on our accumulated debt. And meanwhile entitlement spending on Social Security, Medicare and Medicaid is also growing rapidly. At this point debt increases very rapidly which leads to a severe
Fiscal Crisis.

Of course things don’t have to happen like this. Congress might become more responsible and either cut spending and/or raise taxes and start shrinking our huge deficits. Or perhaps slow growth really is the new normal and interest rates will remain low indefinitely. But slow growth is not pain free; there are many millions of unemployed and under-employed Americans who want to work and whose lives are stunted otherwise.
Slow growth is a very destructive path to be following. We badly need to adopt policies to speed it up!

Could the U.S. End Up Like Greece? II. How Long Will It Take?

Posted on July 2, 2015 by jackheidel

My last blog post, “Could the U.S. End Up Like Greece?” compares Greece’s present fiscal situation (public debt at 180% of GDP) with our own current fiscal situation (public debt at 74% of GDP and rising fast). The Congressional Budget Office predicts that, under current policy, the U.S. debt will not reach 180% until about 2055, forty years from now. One could (wrongly!) conclude from this that we are okay for the time being.
However, this is not true! The Peter G. Peterson Foundation has taken a closer look at the most recent CBO report. Under a less optimistic, but more realistic, Alternative Fiscal Scenario, the U.S. debt will reach 175% in 2040. The Alternative Fiscal Scenario assumes, for example, that:

About 50 expiring tax breaks will continue to be extended year by year, as they were in 2014 and have been repeatedly in the past. These “tax extenders” increase the deficit by over $40 billion per year.
Discretionary spending will soon rise back up to its historical share of GDP. In other words, the sequester, which is currently holding down the growth of discretionary spending, may be overridden or at least relaxed.

Greece, with its debt at 180% of GDP, is only being required by the European Central Bank to pay 1.7% interest on this debt indefinitely into the future. Thanks to the low interest rate policy of the Federal Reserve, 1.7% is also the current rate of interest being paid on the U.S. debt. But this historically low interest rate is unlikely to continue much longer without setting off a much higher rate of inflation.
In other words, we’ll likely be in the same situation as Greece is currently, in much less than 25 years. Furthermore, Germany and the other EU countries have been keeping Greece afloat for years and may continue to do so.
Who is going to bail us out when we get to where Greece is now? China? Unlikely. We’ll be on our own and it won’t be pretty!

The Fiscal Time Bomb Is Still Ticking!

Posted on June 18, 2015 by jackheidel

The Congressional Budget Office is by far the most objective source of detailed information about the federal budget, playing a valuable role in the super-charged political atmosphere of Washington D.C. It has just released a new annual report, “The 2015 Long-Term Budget Outlook,” projecting our fiscal health for the 25 year window, 2015-2040, based on current policy. It is a scary scenario indeed.
As shown in the above chart, our public debt (on which we pay interest) has increased from 38% of GDP at the beginning of the Great Recession in 2008 to 74% today. Although it will remain steady at this high level for about five years, it will then resume a steady increase, reaching a level of about 100% of GDP by 2040.
As many observers, including myself, have pointed out, when interest rates eventually return to their normal historical level of around 5%, interest payments on this huge, and rapidly increasing, debt will double or triple from their current low level, causing a very painful budget shortfall.
Simple prudence suggests that the only responsible course of action is to put our debt on a downward path, as a percentage of GDP, in order to minimize this looming problem to the greatest possible extent.
CBO gives some useful guidelines for what is required to do this:

Just to keep the debt at its current value of 74% of GDP by 2040 would require an annual 6% increase in revenue or a 5½% decrease in spending. This would amount, for example, to a $210 billion spending cut for 2016.
To reduce the debt to 38% of GDP by 2040, its average over the past 50 years, would require an annual 14% increase in revenues or a 13% decrease in spending. The spending cut for 2016 would be $480 billion.

These examples show the enormity of the fiscal mess we have gotten ourselves into. Under current policy it will require a big effort just to stay even with where we are right now, without showing any debt reduction over the next 25 years!
Our only hope is to change current policy. But how?

The Bush Deficits vs the Obama Deficits

Posted on February 10, 2015 by jackheidel

As I like to remind readers, I am a fiscal conservative and a social moderate. I started writing this blog in November 2012, after running unsuccessfully in a Republican congressional primary in May of that year. I am appalled by our reckless fiscal policies in recent years. We simply have to get federal spending in much better alignment with tax revenue and do this in a relatively short period of time.
Both political parties are responsible for our current predicament. Nevertheless, we need to have the best factual information available to help us get back on track. Today I compare the Bush deficits with the Obama deficits. The most objective way to do this, in my opinion, is to divide the transition budget years, 2001 and 2009, between the incoming and outgoing presidents. In other words, October, November and December of the year 2000 are assigned to President Clinton and the last nine months of the 2001 budget year, i.e. January 2001 – September 2001, are assigned to President Bush. Likewise for the 2009 budget year, when Bush was leaving office and President Obama was coming in.
A good source for such detailed budget information is the website of David Manuel, “an online repository of financial and political information that is often searched for but is generally hard to find.”
Here is what I’ve come up with:

President Bush

2001 budget year (last 9 months) $129.6 (billion) surplus
2002 budget year $157.8 (billion) deficit
2003 budget year $377.6 (billion) deficit
2004 budget year $413 (billion) deficit
2005 budget year $318 (billion) deficit
2006 budget year $248 (billion) deficit
2007 budget year $161 (billion) deficit
2008 budget year $459 (billion) deficit
2009 budget year (first 3 months) $332.5 (billion) deficit
$2,337.3 (billion) deficit TOTAL

President Obama

2009 budget year (last 9 months) $1080.5 (billion) deficit
2010 budget year $1294 (billion) deficit
2011 budget year $1299 (billion) deficit
2012 budget year $1100 (billion) deficit
2013 budget year $ 683 (billion) deficit
2014 budget year $ 483 (billion) deficit
2015 budget year (CBO estimate) $ 468 (billion) deficit
2016 budget year (CBO estimate) $ 467 (billion) deficit
2017 budget year (first 3 months, CBO) $ 163 (billion) deficit
$7,037.5 (billion) deficit TOTAL

These totals represent, of course, the amounts that were added (Bush) or will be added (Obama) to the national debt during their terms of office. George Bush made little, if any, effort to control deficit spending. But the Obama debt is three times as bad as the Bush debt. Getting the debt under control is by far our biggest and most urgent national problem. By failing to take our debt seriously, both Bush and Obama have been huge failures as president!

A Lull in the Storm

Posted on January 27, 2015 by jackheidel

The Congressional Budget Office has a sterling reputation for collecting accurate data and making credible predictions about basic economic and fiscal trends. CBO analyses, which are based on current law, are generally accepted as valid by both liberals and conservatives. Considering the degree of hyper-partisanship in most discussions of fundamental policy, it is reassuring to at least have an unimpeachable source of basic information.
CBO has just released its regular annual report, ”The Budget and Economic Outlook: 2015-2025.” There is good news for the near term. As shown above, GDP is projected to grow by 2.9% in the (budget) years 2015 and 2016, and dropping to 2.5% growth in 2017, which is still better than 2014. This means that our national debt will not grow from its current level of 74% of GDP for the next few years and might even decrease slightly.
Growth will then hover around 2.2% for the remainder of the 2015 – 2025 decade, which is the average GDP since the end of the Great Recession in June 2009. Likewise, unemployment will likely not fall much below its current value of 5.6% for the next ten years. In short, under current policy, except for the next couple of years, we are stuck in the same slow-growth rut where we have been for the past five and one-half years.
It should be obvious that we need new policies to speed up growth, put more people back to work, and raise the stagnant wages endured by many middle- and lower-income workers. How can this be accomplished?

Tax reform, both individual and corporate, is the primary route to faster growth. Lower tax rates across the board, paid for by closing loopholes and shrinking deductions. This will put extra income in the pockets of the 64% of taxpayers who do not itemize deductions, which they will likely spend. It will also make it easier for potential entrepreneurs to successfully launch a new business.
Immigration reform, expanded foreign trade and deregulation will also create more business opportunities which will in turn grow the economy and create more jobs.

Hopefully the new Congress will be able to move forward in this direction. A better future depends on it!

Barack Obama vs Paul Ryan: Who Is Moving Us in the Right Direction?

Posted on August 18, 2014 by jackheidel

“If you give a man a fish you feed him for a day. If you teach a man to fish you feed him for a lifetime.”
Chinese Proverb

Several weeks ago my post, “How to Improve America’s Welfare System,” described a new proposal from the House Budget Committee (Chair, Paul Ryan) to let selected states experiment in consolidating separate federal programs such as SNAP, TANF, child-care and housing assistance programs, into a new composite Opportunity Grant Program. The idea is to let participating states choose qualified providers who would then be held accountable for moving people off of assistance, out of poverty and into productive employment.
A recent report from the Tax Foundation compares what families pay in taxes with what they receive in government benefits. In 2010, 60% of American families (with incomes up to $86,000) received more in federal benefits than they paid in federal taxes. However in 2012, this percentage grew to 70% (those families with incomes up to $109,000). In other words, the trend under Obama is for more people to be net receivers of benefits than net payers of taxes. There are two basic problems with this trend towards more and more benefits for more and more people:

As it stands right now, we’re making people more dependent on government programs. Instead we should be helping them become more independent and more capable of supporting themselves on their own. This would improve their quality of life.
Our federal government is spending way too much money and not collecting enough tax revenue to pay the bills. According to report after report from the Congressional Budget Office, the trajectory of growing debt is getting much worse and the problem will become harder and harder to rectify as we continue down this path.

My natural inclination is to be optimistic that our political process will respond to this bleak current path we’re on and that things will be turned around before we have another financial crisis. But it is easy to imagine a course of events where this does not happen.
It’s clear what we need to do but how will this get done?

The Big Picture on Debt Part IV The Full Model

Posted on August 14, 2014 by jackheidel

For the past week I have been discussing different aspects of our alarming debt problem as vividly illustrated in a recent report from the Congressional Budget Office (see chart below). My last post discusses what I call the Buffett Model: G > D, meaning that as long as nominal growth G (real growth plus inflation) is greater than the deficit D, then the accumulated debt will decrease as a percentage of GDP and the debt is said to be “stabilized”. This, of course, is what has happened in the U.S. historically after all of our major wars and especially after WWII (see below). The problem is that our current situation in 2014 appears much bleaker going forward because the debt is projected (by CBO) to just keep on growing indefinitely.
Today I look at a broader model, the so-called BRITS model: R + I > (S – T) + B where

B = borrowing costs
R = real growth
I = inflation
T = taxes
S = spending.

The BRITS model reduces to the Buffett model by letting G = R + I and D = (S – T) + B. The value of this more general model is to show the relationship between all five of these important variables. To meet the objective of stabilizing debt, according to this intuitive model, we should increase both R and I and decrease S – T and B.
The Federal Reserve is involved by keeping B as low as possible and making sure that I is large enough (but not too large or other problems will occur). Congress can help by cutting spending or raising taxes but, of course, both of these actions are hard to do politically.
If real growth R is high enough then the desired inequality will hold and debt will be stabilized. But how is this accomplished? The Fed has been trying to increase growth through quantitative easing but it’s not working very well. Many economists think that it would be more helpful for Congress to implement broad based tax reform, whereby tax rates are lowered and loopholes and deductions are closed in a revenue neutral manner so that overall tax revenue remains the same. But nobody wants to lose their own deductions so this is hard to do.
As much as faster growth will help, it is still critical for Congress to get spending under control. The above chart from the Heritage Foundation shows that under current trends by 2030 federal spending will have increased so much that all federal tax revenue will be spent on just entitlements and interest payments alone! Since this is unrealistic, some sort of a major new crisis is likely to occur before 2030!
Conclusion: The BRITS model helps to understand the complexity of our debt problem and some of the steps that need to be taken to alleviate it. I will return to it in the future.

The Big Picture on Debt II. Why It Is So Alarming

Posted on August 10, 2014 by jackheidel

My last post, “The Big Picture on Debt,” used a chart from a recent Congressional Budget Office report (pictured below) to look at the history of U.S. debt. It is worse now than at any other time except at the end of World War II. But after 1945 massive military spending ended rapidly, the economy started growing briskly and debt as a percentage of GDP shrunk rapidly.
The light purple section at the right hand side of the chart portrays CBO’s debt projection for the next 25 years. As the report itself makes clear, CBO is using favorable economic assumptions in this projection. Without these favorable assumptions, our future debt will be much worse than this. And the same trends continue indefinitely into the future beyond the 25 year window.
Right now our huge debt is almost “free” money because interest rates are so low. But this situation cannot last much longer without setting off an inflationary spiral. As interest rates eventually resume their historical average of about 5%, interest payments on our accumulated debt will skyrocket and therefore increase the size of the annual deficits.
There are only three ways to shrink debt as a percentage of GDP: 1) cut spending, 2) achieve faster growth and 3) raise tax revenue. Let’s look at each in turn:

Government spending as a percentage of GDP is not shrinking but actually growing. Primarily this is because of the massive growth of the big three entitlement programs: Social Security, Medicare and Medicaid. All other government spending is subject to Sequester limits. This is a crude and insufficient way to control discretionary spending.
GDP growth, averaging 2.2% annually since the end of the Great Recession five years ago, is much slower than the overall average growth of 3.3% since the end of WW II. Major tax reform at both the individual and corporate levels, with lower tax rates offset by closing loopholes and shrinking deductions, would give a big boost to economic growth. But there is resistance to cutting tax deductions.
Raising taxes will in principle decrease deficit spending but the trick is to do it without hurting economic growth. Both individual and corporate tax reform could accomplish this if done in the right way. See here and here for specific proposals.

Conclusion: there are concrete ways to find solutions to get our massive accumulation of debt under control and shrinking as a percentage of GDP. But the prospects for action are gloomy.

The Big Picture on Debt

Posted on August 7, 2014 by jackheidel

Most observers agree that the Congressional Budget Office is a reliable source for detailed, objective and nonpartisan information about the federal budget. Its frequent reports are cited by all sides in budget debates. Today I refer to the recent CBO publication, “The 2014 Long-Term Budget Outlook in 26 Slides.” In particular, one of its graphs entitled “Federal Debt Held by the Public” (pictured here) has a striking message.
Throughout history, the U.S. has had relatively large debt following each of its major wars, especially after World War II. But the debt has always declined relatively quickly, as a percentage of GDP, as the economy recovered and grew briskly. But now, in 2014, we are stuck with a huge debt which is projected (by CBO) to not shrink but rather to keep getting much worse. And furthermore, the so-called “Extended Baseline Projection” in the graph, is an optimistic projection which disregards several long-term trends such as mortality decline, possibly slower productivity growth, higher interest payments and likely growth of federal healthcare spending.
How in the world will this huge debt problem be resolved in a favorable manner? Republicans don’t want to raise taxes and Democrats don’t want to cut spending, especially on entitlements. The only action taken in the last few years, under threat of not lifting the federal debt limit, was to implement a Sequester on discretionary spending. This helps but not nearly enough.
Recent budget agreements are not auspicious for future progress. A five year farm bill was passed last spring without significant cuts to either farm subsidies or food stamps. Highway spending was extended for a few months with a gimmick when what we really need to do is increase the federal gasoline tax. A $17 billion (over three years) increase for veteran’s health has just been approved when what we really need is an extensive overhaul of the Veterans Administration.
There are deficit hawks in Congress, on both sides of the aisle, but their numbers are too small to be effective. It is just very hard to vote no on spending measures when the pressure coming from special interest groups on all sides is to vote yes.
I am an eternal optimist by nature but I have a hard time visualizing a favorable outcome to our fiscal dilemma. I am arranging my own affairs accordingly.

How to Improve America’s Welfare System

Posted on July 27, 2014 by jackheidel

Several months ago I had a post entitled “A Balanced and Sensible Antipoverty program,” describing four characteristics of effective antipoverty programs: work requirements, work incentives, supporting married, two-parent families, and supporting business growth.
The Budget Committee of the House of Representatives has just released the outline of a new plan, “Expanding Opportunity in America,” designed to implement the above basic principles of welfare reform. The introduction states that “Fifteen percent of Americans live in poverty today – over 46 million people. … A key tenet of the American Dream is that where you start off shouldn’t determine where you end up. … Of all Americans raised in the bottom fifth of the income scale, 34% stay there and just 38% make it to the middle class or above (see the chart below).”
The idea is to let selected states experiment in consolidating separate means-tested programs such as SNAP, TANF, child-care and housing assistance programs, into a new holistic Opportunity Grant program. The purpose is to make these programs more effective in lifting welfare recipients out of poverty. Here is how the program is envisioned to work:

Each participating state will approve a list of certified providers who are held accountable for achieving results such as moving people to work, out of poverty and off of assistance.
Needy individuals will select a provider who will conduct a comprehensive assessment of that person’s needs, abilities and circumstances.
The provider and the recipient will develop a customized plan and contract both for immediate financial needs and also for long term goals towards self-sufficiency.
Successful completion of a contract will include able-bodied individuals obtaining a job and earning enough to live above the poverty line.

The U.S. is currently spending over a trillion dollars a year on welfare programs for low income families and individuals. A good way to increase both the efficiency and effectiveness of federal programs is to shift them over to state control. The Opportunity Grant program proposes to do this on an experimental basis. It makes good sense to try it!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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