The Economic Outlook: 2014 – 2024 I. The Basic Data

Posted on February 6, 2014 by jackheidel

The Congressional Budget Office has just issued the report ”The Budget and Economic Outlook: 2014 to 2024”, giving its usual objective and nonpartisan look at our prospects for the next ten years. My purpose today is to give a simple interpretation of its basic data. In my next post I will address the implications of this interpretation.
The first chart above shows a forty year history of government deficit spending. The average deficit for this time period is 3% of GDP. From 1982 – 1987 the deficits were worse than this and from 2009 – 2013 they were much worse. The real problem is the accumulated deficits, i.e. the debt. The second chart above shows the public debt (what we pay interest on) all the way back to 1940 as a percent of GDP. As recently as 2008, the public debt was below 40% of GDP. Now it is 73% and climbing. This is very serious for two reasons. Right now our public debt is almost free money because interest rates are so low. But when interest rates return to their normal level of about 5%, interest payments will explode and be a huge drain on the economy. In addition, these CBO predictions assume continued steady growth of the economy. If and when we have a new recession or some other financial crisis, there will be much less flexibility available for dealing with it.
Now look at the last two charts. The first one shows the rate of GDP growth since 2000 which has averaged about 2% since the end of the recession in June 2009 and is projected by the CBO to level off at this same rate over the next 10 years. This is an historically low rate of growth for our economy. The final chart shows the gradual decrease of the labor force participation rate over this same time period. These two graphs are related! When fewer people are working, the economy simply will not grow as fast.
High debt and slow growth are big problems for an economy. We’re falling more deeply into this perilous state of affairs all the time. We need to take strong measures to break out of this dangerous trap!

Let’s Devolve Federal Programs Back to the States!

Posted on February 4, 2014 by jackheidel

Yesterday’s New York Times has an article “Battles Looming Over Surpluses in Many States”, pointing out that “unexpectedly robust revenues from taxes and other sources are filling most state coffers, creating surpluses not seen in years and prompting statehouse battles over what to do with the money.” For example, in Kansas, Governor Sam Brownback is calling for full day kindergarten for all students.
This raises a larger issue. The states are recovering from the Great Recession and have lots of money. We know that states spend money far more efficiently than the federal government, because states have constitutional requirements to balance their budgets. On the other hand, the federal government is hemorrhaging red ink at a frightening rate which will just keep getting worse indefinitely until strong measures are taken. It has taken on far too many responsibilities and spends money very inefficiently.
All of this suggests an obvious course of action to turn around a very bad situation. We should devolve as many federal programs as possible back to the states. Here are three good ones to start with:

Medicaid costs the federal government about $250 billion per year with another $150 billion being paid for by the states. The problem is that federal support is a fixed percentage of what the states spend. This makes Medicaid a very expensive program with no limit on the cost to the federal government. A good way to solve this problem is to “block grant” Medicaid to the states and let each state figure out the best way to spend its own federal allotment. Annual increases in the size of federal block grants could be tied to the rate of inflation in order to limit their growth.
Education spending at the federal level is a $100 billion per year (not counting student loans) item. Just at the K-12 level alone there are over 100 individual programs to which states and school districts have to apply for funds separately. Wouldn’t it make far more sense to “block grant” education funds back to the states so that this large sum of money can be spent more effectively and efficiently by targeting it at the biggest needs in each state?
Job-Training costs the federal government $18 billion per year for 47 different programs. Again it would be so much more sensible to block-grant job training funds to the states and measure effectiveness by the number of workers hired.

There really are relatively simple ways for the federal government to operate more effectively and at much lower cost. We need national leaders who are committed to getting this done.

Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems I. Why Change Is Needed

Posted on January 5, 2014 by jackheidel

I have been writing this blog for just over a year. It addresses what I consider to be the two biggest problems faced by our country at the present time. First is our enormous national debt, now over $17 trillion, and the huge annual budget deficits which are continuing to make it worse. The second problem, of equal magnitude, is our slow rate of economic growth, about 2% of GDP annually, ever since the Great Recession ended in June 2009.
These two problems are closely related. If the economy grew faster, federal tax revenue would grow faster and the annual deficit would shrink faster. Not to mention that a faster growing economy would create more jobs and lower the unemployment rate, which is still a high 7%.
The impediments to solving these problems are huge. Our public debt, on which we pay interest, is now over $12 trillion or 73% of GDP. Although it may stabilize at this level for a few years, it will soon begin climbing much higher, without major changes in current policy. This is primarily because of exploding entitlement spending for retirees (Social Security and Medicare) who will increase in number from about 50 million today to over 70 million in just 20 years. As interest rates return to normal higher levels, just paying interest on the national debt will become, all by itself, a larger and larger drain on the economy.
The impediments to faster economic growth are increasing global competition, such as inexpensive foreign labor, as well as rapid advances in technology, such as electronics and robotics. Both of these trends reduce the need for unskilled workers in America which in turn holds down wages and slows down economic growth.
At the same time we have an antiquated tax code to raise the huge sums of money necessary to pay for a large and complex national government. It worked fine through the post-World War II period, as long as the U.S. had the dominant world economy with little significant competition from others. But this situation no longer exists. We now have a tax system which doesn’t raise enough money to pay our bills and at the same time is so progressive that the highest rates (39.6% on individuals and 35% for corporations) are not sufficiently competitive with other countries. This discourages the entrepreneurship and business investment we need to grow the economy faster and create more jobs.
We have an enormous problem on our hands! Is it possible to fundamentally change our tax system to turn things around? My next post will answer this question in the affirmative!

Oklahoma’s Senator Tom Coburn: We Need More like Him!

Posted on January 2, 2014 by jackheidel

Senator Tom Coburn of Oklahoma has an Op Ed column in the Wall Street Journal from two days ago “The Year Washington Fled Reality”, discussing many of the things that are wrong with our national government. Granted that all elected officials “play politics” to some extent or another, nevertheless Dr. Coburn, an obstetrician, is amazingly independent of the reigning political culture. He spent three consecutive terms in the House of Representatives, left Congress for four years, and now is back serving his second term in the Senate. He has announced that he will not run for re-election in 2016 when his present term ends.
Dr. Coburn is constantly drawing attention to, and attacking, the enormous amount of wasteful and inefficient spending approved by Congress. The Popular Romance Project, pictured above, is an example. His office has just published its fourth annual report on government waste, “Wastebook 2013”, detailing 100 different “examples of government mismanagement and stupidity. … Collectively these cost nearly $30 billion in a year when Washington would have you believe everything that could be done, has been done to control unnecessary spending.”
Dr. Coburn has prevailed upon the Government Accounting Office to issue annual reports called “Actions Needed to Reduce Fragmentation, Overlap and Duplication and Achieve Other Financial benefits.” Three of these reports have now been issued. Altogether they list almost 400 individual actions which could be taken to improve the efficiency and effectiveness of 162 different program areas.
In spite of all the good work he is doing, Dr. Coburn would be even more effective if he had more help. Fiscal conservatives should stop wasting their time on senseless gestures like trying to defund Obamacare. They need to get down in the trenches with serious deficit hawks like Tom Coburn and whittle away at wasteful programs one by one.

Why Is It So Hard For Congress To Do Its Job?

Posted on December 15, 2013 by jackheidel

In response to the recent budget deal which has already passed the House of Representatives, Taxpayers for Common Sense has issued a new report “Real Savings, Real Deficit Reduction: Relieving Budget Caps with Common Sense Savings in Fiscal Year 2014”, showing how $100 billion could be cut from the federal budget for fiscal 2014, completely offsetting the supposedly onerous cuts required by the sequester. Here is a summary of what TCS has come up with:

Of course there are many ways to achieve $100 billion in savings in a single year and this is only one particular way to do it. But it is a balanced plan making roughly comparable cuts from many different agencies and also including a significant amount of tax expenditure savings. It would, of course, be much better to also include adjustments to entitlement spending such as Social Security and Medicare. A big reason for keeping the sequester in place, or offsetting it with equivalent cuts, as TCS is suggesting, is to create more interest in making necessary changes in entitlement programs.
Yet another way of accomplishing the same goal would be to keep the sequester spending levels in place but to give each government agency the authority to rearrange the spending cuts within its only agency. This is what management should be doing anyway on a routine basis.
It is very disappointing that Congress will not do the job, one way or another, that is required to operate the government on a sound financial basis. Let’s hope that the voters make big changes in the elections coming up in 2014!

The Mess in Detroit: A Stern Warning for the Whole Country

Posted on December 5, 2013 by jackheidel

An article in yesterday’s New York Times, “Detroit Ruling Lifts a Shield on Pensions”, reports a ruling by bankruptcy judge Steven W. Rhodes that Detroit “could formally enter bankruptcy and that Detroit’s obligations to pay pensions in full is not inviolable.”
The article goes on to say “that most here agree that the city’s situation is dire: annual operating deficits since 2008, a pattern of new borrowing to pay for old borrowing, miserably diminished city services, and the earmarking of about 38 percent of tax revenues for debt service. A city that was once the nation’s fourth largest has dropped to 18^th, losing more than half of its population since 1950. The city was once home to 1.8 million people but now has closer to 700,000.”
The parallels and analogies between what has happened in Detroit and what is now happening in the U.S. are striking. The U.S. has had huge annual deficits for five years in a row and the accumulated debt is enormous, the Federal Reserve is holding interest rates down to make borrowing cheaper, and our country’s infrastructure is deteriorating much faster than it is being repaired.
Right now interest on the national debt is small ($223 billion in 2013, or 8% of federal revenues). But interest rates will inevitably return before long to their average historical rate of about 5%. Right now the public debt (on which we pay interest) is just over $12 trillion. This means that in the near future interest on the national debt will be at least $600 billion per year and probably much larger because the debt is still growing so rapidly. This will take a huge bite out of revenue and leave far less of it for other purposes.
This problem will continue to exist even if the budget were to be miraculously balanced from now on but it would at least lessen over time as the economy continues to grow. Without budget restraint the problem will never go away and will be a perpetual drag on our national welfare.
This is, of course, exactly the condition in which Detroit finds itself at the present time. Detroit has the option to declare bankruptcy and make its creditors and pensioners take big losses. Once it does this it can make a fresh start and perhaps recover its former status.
But are we prepared to let the whole country suffer a similar fate? The consequences would be enormous. If the U.S. goes down, the whole western world could come down with it. Democracy and human progress would be severely threatened. This is really too terrible a tragedy to even contemplate. Let’s turn things around before they get any worse!

Nowhere to Cut? II. Are You Really Trying?

Posted on November 19, 2013 by jackheidel

The New York Times has a story today, “A Dirty Secret Lurks in the Struggle Over a Fiscal ‘Grand Bargain’”, suggesting that there are really two reasons why the House-Senate Budget Conference Committee, chaired by Representative Paul Ryan and Senator Patty Murray, is unlikely to accomplish very much. The simple reason is that the Republicans will not support tax increases, on which the Democrats insist, and the Democrats will not support major changes to entitlement programs, on which the Republicans insist.
But the “dirty secret” (according to the NYT) is that Republicans don’t really want to trim either Social Security or Medicare, which many Tea Partiers receive, and Democrats don’t really want to raise taxes on the upper income individuals who support them. Furthermore, the deficit for 2013 was “only” $680 billion, and is expected to drop further in the next few years, while interest rates are so low that borrowing hundreds of billions of dollars each year is not expensive. In other words, just kick the can down the road. Let somebody else worry about the problem in the future.
My previous post “Nowhere to Cut”, based on the report from the Congressional Budget Office, “Options for Reducing the Deficit: 2014 – 2023”, picks 14 possible budget cuts or revenue enhancements out of a total of 103 such items listed. Just these 14 items alone amount to a savings of $566 billion over ten years, more than enough to offset half of the entire sequester amount.
For example, raising the eligibility age for Medicare to 67 would save $23 billion (over 10 years), using the ‘chained’ CPI to measure inflation for all mandatory programs would save $162 billion, tightening eligibility for food stamps would save $50 billion, taxing carried interest as ordinary income would save $17 billion, limiting highway funding to expected highway revenues would save $65 billion, reducing the size of the federal workforce through attrition would save $43 billion, limiting medical malpractice torts would save $57 billion, and modifying Tricare fees for working-age military retirees would save $71 billion. Just these eight savings total $456 billion and would offset almost half of the entire sequester.
What is so difficult about making a tradeoff deal like this? Isn’t this what we send people to Washington to do?

Nowhere to Cut?

Posted on November 17, 2013 by jackheidel

After five years of enormous deficits, our national debt now stands at over $17 trillion. The only spending restraint that Congress has been able to achieve so far is an approximately one trillion dollar “sequester” over ten years, therefore amounting to about $100 billion per year in spending cuts. Federal expenditures have actually dropped for two years in a row now so the sequester really does work. Of course, almost everyone complains about cutting spending in such a “dumb” way. Why not make intelligent budget cuts by eliminating the least effective programs instead of having to make small percentage cuts in all discretionary spending, good and bad alike? Well, this really should not be all that difficult to do if Congress would try a little harder.
The Congressional Budget Office has just released a helpful report, “Options for Reducing the Deficit: 2014 to 2023”, which lists 103 ways for either decreasing spending or increasing revenues over the next decade. Amazingly, enacting all of these proposals would amount to a budget savings of $13 trillion over 10 years, ten times what is required by the sequester! Here are some examples of what could be done (along with the 10 year savings):

Eliminate direct payments to agricultural producers $25 billion
Increase federal insurance premiums for private pensions $5 billion
Reduce the amounts of federal pensions $6 billion
Tighten eligibility for food stamps $50 billion
Use more accurate measure of inflation for all mandatory programs $162 billion
Replace some military personnel with civilian employees $19 billion
Limit highway funding to expected highway revenues $65 billion
Eliminate grants to large and medium sized airports $8 billion
Eliminate subsidies for Amtrak $15 billion
Reduce the size of the federal workforce through attrition $43 billion
Tax carried interest as ordinary income $17 billion
Limit medical malpractice torts $57 billion
Raise the age of eligibility for Medicare to 67 $23 billion
Modify Tricare fees for working-age military retirees $71 billion
Total $566 billion

Right here is more than enough to offset half of the sequester. You don’t like these cuts? Then replace them with others from the CBO report. There are lots of options to choose from!

Is It Mean Spirited to Cut Food Stamps?

Posted on November 7, 2013 by jackheidel

In yesterday’s Wall Street Journal, columnist William Galston writes “In Defense of Food Stamps” that “food stamps reach their intended targets, poor and near-poor Americans. The large increase in the program’s cost over the past decade mostly reflects worsening economic conditions rather than looser eligibility standards. Since 2000 the number of individuals in poverty has risen to 46.5 million from 31.6 million.”
Mr. Galston also states that “the number of able-bodied adults without dependents receiving benefits under the food stamp program has risen to nearly 5.5 million from under 2 million since 2008 even as work requirements for those individuals have been relaxed. Here the critics have a case: the federal government should reconsider the waivers of current requirements it has extended to 44 states and the District of Columbia and it should consider toughening those standards.”
Congressional Republicans have proposed cutting $40 billion from the food stamp program over 10 years, or $4 billion per year. Since the total food stamp budget is $80 billion per year, this amounts to a 5% cut. And this 5% cut is directed precisely at those 5.5 million able-bodied adults without dependents. Expecting these people to find a job, even if minimum wage, in return for receiving food stamps, is not asking too much. It is really just “tough love” more than anything else.
Putting a substantial portion of these 5.5 million able bodied adults back to work would also be a big boost to the economy. One of the biggest drags on the economy at the present time is the low labor participation rate which has dropped from about 66% to 63% since the recession began in 2008-2009.
Trying to make the food stamp program more cost effective is really just an example of what should be done across all programs of the federal government, routinely, as a matter of sound operating procedures. It is unfortunate that ideology and political partisanship get in the way of such common sense!

Are Deficit Fears Overblown?

Posted on November 1, 2013 by jackheidel

In yesterday’s Wall Street Journal columnist David Wessel responds too mildly in “Why It’s Wrong to Dismiss the Deficit” to Larry Summers’ view that we should not worry about the deficit. Mr. Summers says, “Let me be clear. I am not saying that fiscal discipline and economic growth are twin priorities. I am saying that our priority must be on increasing demand.” According to Mr. Wessel, here is the essence of Mr. Summers’ argument:

The deficit isn’t an immediate problem; growth is.
We’ve done enough (about the deficit) already.
The future is so uncertain that acting now is unwise.

Granted that the deficit for fiscal year 2013 is “only” $680 billion after four years in a row of deficits over a trillion dollars each and that interest rates are at an historically low level at the present time. The problem is that the public debt is now at the very high level of 73% of GDP and is projected by the Congressional Budget Office to continue climbing indefinitely. Interest on the debt was $415 billion for fiscal year 2013 which represents 2.5% of GDP of $16.8 trillion. With GDP growth increasing at about 2% per year since the end of the recession in June 2009, this means that interest on the debt is already slowing down the economy and it’s just going to keep getting worse as interest rates inevitably return to higher historical levels.
Growth is very definitely an immediate problem. But increased government spending is the wrong way to address it. The right way to address it is with broad based tax reform (lowering tax rates in return for closing loopholes) to stimulate investment and risk taking by businesses and entrepreneurs. Significant relaxing of the regulatory burden would also help, especially for the small businesses which are responsible for much of the growth of new jobs. So would immigration reform to boost the number of legal workers.
As uncertain as the future is, we can be quite sure that entitlement spending (Social Security, Medicare and Medicaid) will be going up fast in the very near future as more and more baby boomers retire and the ratio of workers to retirees continues to decline. It would be very risky indeed to assume that economic growth will increase fast enough to pay for increased entitlement spending.
Conclusion: large deficits are a very urgent and immediate problem which we ignore at our peril! Furthermore the best ways of boosting the economy don’t require increased government spending.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Tag Archives: cutting spending