Prominent Myths about Our National Debt

Posted on August 6, 2015 by jackheidel

As the 2016 presidential election contest begins to heat up, the Committee for a Responsible Federal Budget and its outreach arm, Fix the Debt, have issued a new “Fiscal FactChecker: 16 Budget Myths to Watch Out For in the 2016 Campaign.” Here are four of the major myths:

We Can Continue Borrowing Without Consequences. “Low interest rates are a temporary consequence of the struggling global economy and near term Federal Reserve actions – not a permanent fixture.”
There is No Harm in Waiting to Solve Our Debt Problems. “The longer policy makers wait to control debt, the more difficult it will become. For example, reducing debt to around the historical average of about 40% of GDP by 2040 would require tax increases or spending cuts of about 2.6% of GDP per year, if enacted today, or starting at $1,450 per person per year. Waiting a decade to begin would require adjustments of over 4% of GDP.”
Deficit Reduction is Code for Austerity, Which Will Harm the Economy. “Most advocates of fiscal responsibility in the U.S. have called for gradual reductions in long-term deficits so that the debt grows slower than the economy. These changes tend to have minimal near-term effects as well as the potential to significantly grow the size of the economy over the long term.”
We Can Fix the Debt Solely by Taxing the Top 1%. “The top 1% of earners, households that make at least $450,000 annually, earn a substantial share of national income, about 13% on an after tax basis, and further tax increases on this group could help. But these increases would need to be combined with reductions in spending growth and/or broader tax increases to fully address the nation’s fiscal challenges.”

Just a few days ago, I described a persuasive argument, “America’s Fourth Revolution,” that our hyper-partisan and dysfunctional political system will be unable to rectify our debt problem until we have another and much more severe financial crisis. The above discussion of budget myths from CRFB actually suggests a way forward to solve our debt problem.
We have a choice. Which path will we take?

Can America’s “Fourth Revolution” Be Avoided?

Posted on August 2, 2015 by jackheidel

My last post, “America’s Fourth Revolution,” presented a persuasive argument by the political scientist, James Piereson, that our currently dysfunctional political system will be unable to solve our most fundamental problems of massive debt, accompanied by a rapidly aging population and slowing economic growth. This will result, according to Mr. Piereson, in a severe crisis leading to a fourth revolution, overthrowing the New Deal liberal consensus which has prevailed since 1932.
It is commonly understood that entitlement spending: Social Security, Medicare and Medicaid, is the main driver of our rapidly growing national debt. A recent report from the Centers for Medicare and Medicaid Services, summarized in the Wall Street Journal, shows that U.S. healthcare spending is likely to rise from just under 18% today to 19.6% of GDP in 2024.
Barron’s editor, Thomas Donlan, has just reported that the Director of the Congressional Budget Office, Keith Hall, stated in a recent hearing of the Senate Budget Committee that if spending for Medicare and Medicaid, as a percentage of GDP, fell by 25% over ten years, and then stayed in line with GDP after that, the U.S. would have a budget surplus of 2% of GDP in 2040 instead of the otherwise projected deficit of 6.6% of GDP. Furthermore debt held by the public would fall to 24% of GDP, a remarkable achievement.
This is significant because one country, The Netherlands, spends 12% of GDP on healthcare, and every other country in the world (except for the U.S.) spends less than 12%.
Conclusion: all the U.S. needs to do, so to speak, is to bring healthcare costs in line with the rest of the world and our entire deficit spending problem would be solved! Nobody is claiming that this will be easy but it certainly is within the realm of possibility. It is also far superior than waiting to act until we have another fiscal crisis and thus risking a huge change, a revolution, in our way of life.

America’s Fourth Revolution

Posted on July 28, 2015 by jackheidel

The Manhattan Institute’s James Piereson has written a fascinating new book, ”Shattered Consensus: The Rise and Decline of America’s Postwar Political Order” in which he argues that the New Deal liberal consensus has broken down and will soon be replaced by a new model containing several specific features. The coming new model will be the result of a Fourth Revolution of comparable scope to the first three:

A Democratic-expansionist regime from 1800 until 1860 which dissolved in the midst of the slavery and secession crisis.
A Republican-capitalist regime from 1860-1930, which was brought down by the Great Depression.
A Democratic-welfare regime from 1932 until the present, although with faltering support after 1980.

America’s third regime is in the process of fading out or collapsing for three reasons:

Debt. The national debt of $18 trillion today, at about 100% of GDP, is comparable to the debt at the end of WWII. But once the war ended the government cut spending and stopped borrowing and the U.S. economy grew at 4% for the next 20 years. Nothing comparable to this major debt reduction is in sight today.
Demography. Today there are about 160 million people in the U.S. workforce of whom 120 million have full time jobs. The workforce will grow by 1 million per year for the next ten years while the number of people turning 65 will grow at nearly twice that rate. The nation will soon reach a point where 150 million working people will be paying payroll taxes to support 80 million people on Social Security and Medicare. Political leaders are doing nothing to address this looming crisis.
Slowing Economic Growth. The chart above shows how the U.S. economy has been slowing since the 1960’s. Since the end of the Great Recession in 2009, GDP has grown at only 2.2% and is likely (CBO) to continue growing indefinitely at this slow rate under current policies. The second chart shows the enormous difference between 2% growth and, for example, even 3% growth over time.
Why don’t Congress and the President deal with these problems now, before they reach the point of crisis? It’s because Congress has become increasingly polarized, with Democrats having moved leftward and Republicans moving rightward. Polarization is characteristic of regimes as they begin to tear themselves apart in conflicts which defy resolution within the existing structure of politics.
My approach on this blog is that these very severe problems can be solved by politicians working together in a cooperative way. Mr. Piereson makes a very persuasive case that this is not likely to happen and that it will take a huge new crisis, a revolution, to straighten things out.
I hate to say so but he may be right.

Fix It Now: the Political Philosophy of Chip Maxwell

Posted on July 21, 2015 by jackheidel

I have just recently come across the book, “Fix It Now: Rediscover the Constitution and Get America Out of Its Fiscal Death Spiral” by Chip Maxwell, a candidate for Congress in Nebraska’s Second District May 2016 Republican Primary.
Chip lays out his political philosophy very clearly. It is to:

Adopt a Balanced Budget Amendment to the U.S. Constitution, phased-in over ten years.
Phase out Social Security and Medicare for those under age 55.
Dismantle over the next decade the rest of the federal welfare/entitlement system.
Provide social services at the state or local level.
Launch a national effort to build a majority in Congress of crusaders for limited government.
There are some attractive features to Chip’s program but overall I think it is too radical to have much chance at implementation.
I am very much in favor of a balanced budget amendment and a ten year phase-in period is quite reasonable. Furthermore, providing social services at the state and local level would be much more efficient than what we are currently doing and, even with federal support, would be a big help in balancing the budget.
Social Security and Medicare are lifelines for tens of millions of people. We can and should strengthen these programs in order to make them more financially viable for future retirees. They are now part of our national fabric and are here to stay.
Chip’s last principle, promoting limited government, has much appeal but I think is not practical in this day and age. From my perspective, simply passing a Balanced Budget Amendment is sufficient to do what is needed. A BBA will force Congress to set spending priorities and eliminate inferior programs.
Chip Maxwell is to be commended in running for Congress. If elected, he would move the needle in the right direction, even though some of his ideas wont work.

The Moral Case for Free Enterprise

Posted on July 12, 2015 by jackheidel

Capitalism is under attack around the world as Greek socialists complain about their hard- hearted EU creditors, American liberals such as Bernie Sanders and Elizabeth Warren push the Democratic Party to the left, and Pope Francis compares the excesses of global capitalism to the “dung of the devil.”
One of my favorite economic commentators is Arthur Brooks, President of the American Enterprise Institute. One of his books is “The Road to Freedom: How to Win the Fight for Free Enterprise,” which examines the most important economic issues facing the United States from a moral point of view. For example:

Getting the U.S. Economy Growing Again. Weak economic growth means the end of opportunity in America. Furthermore, weak growth disproportionately hurts those who most need new economic opportunities: the poor. One strategy says that the key to restarting economic growth is the state: more stimulus, more taxes, more borrowing. A second strategy says the source of economic growth is free enterprise: tax reform, less government regulation, policies that make it easier for entrepreneurs to succeed, and a smarter immigration policy.
Putting America Back to Work. Jobs are not just a source of money for Americans; they are a ticket to earned success. High unemployment is unfair because it robs people of their potential fulfillment. It is especially harmful to the poor and the young. The key to job creation is to get the economy growing faster.
Getting the United States Out of Debt. Unless the U.S. reduces deficits, it will have just three choices: steal from future generations, inflate the currency to lower the value of the debt or refuse to pay those to whom it owes the money. All of these options are immoral because they are unfair: they harm others who have done no harm to America. Three points here: 1) we have out-of-control entitlement spending, 2) debt crises are more successfully dealt with through spending reductions than with tax increases and 3) there are no quick fixes.

Considering basic economic and fiscal issues from a moral perspective adds an important new dimension to the discussion. We might disagree on the details of how to proceed but it is imperative to take effective action of some kind!

The Root of Greece’s Problem (and Ours)

Posted on July 9, 2015 by jackheidel

Will it be the Euro or Drachma for Greece? It’s down to the wire as Greece and the European Union negotiate the necessary conditions for Greece to remain in the Eurozone. I have devoted several recent posts to the Greek fiscal crisis, pointing out the parallels between the Greek situation and our own.
Greece needs a bailout because its public debt is nearly 180% of GDP. Our own public debt is “only” 74% of GDP at the present time but is predicted by the CBO to reach 175% of GDP by 2040, just 25 years from now. Furthermore, Greece is currently receiving very favorable lending conditions from the European Central Bank, much better than are likely to apply in the U.S. in the long term. This means we’re likely to have another deep crisis on our hands much sooner than 25 years from now.
Consider the data in the above charts from today’s Wall Street Journal. It shows that Greece is spending 14.4% of GDP on pensions, more than any other major European country. Furthermore, the efficiency of its VAT revenue collection is the poorest in the EU. In other words, Greece has a very high rate of entitlement spending and has a poor tax collection system to support it.
In a general sense the U.S. is in a similar situation. Today we spend about 13% of GDP on mandatory, i.e. entitlement, programs, compared to a total tax revenue level of 18% of GDP. Just entitlement spending alone is projected to rise to 18% of GDP by 2050, unless changes are made.
Just as Greece needs to tighten up on pension spending, improve revenue collection and get its economy growing faster, the U.S. needs to tighten up on entitlement spending and speed up its stagnant economic growth as well.
We’re not yet as bad off as Greece is today. But we’re headed in that direction with no one to bail us out when we get there!

The High Cost of Less Austerity

Posted on July 7, 2015 by jackheidel

All eyes are focused on the drama playing out in Greece. The Greeks have just voted not to accept Europe’s latest offer to keep the credit flowing, amounting to a 5% of Greek GDP income transfer from their European neighbors, in return for additional economic reforms to put the country on a path to self-sufficiency.
The New York Times declares, “For Europe’s Sake, Keep Greece in the Eurozone,” that the European Union should “offer some path forward for the Greek economy, starting by writing down its huge and unpayable debts.” More than likely EU leaders will work out a new agreement with Greece to enable it to remain in the EU and the Eurozone. Greece is lucky to be in such a position.
In a recent post, “Could the U.S. End up Like Greece? II. How Long Will It Take?”, I pointed out that the U.S. is likely to have a public debt of 175% of GDP by 2040, the same level as the Greek debt today. Furthermore interest rates are likely to be higher than their unusually low level today which means that we will be making proportionally higher interest payments at that time. In other words, we are likely relatively soon, within 25 years, to have a painfully high level of debt.
Who is going to bail us out when our own debt becomes “unpayable”? Obviously, no one! Right now the austerity and pain caused by the Greek debt is confined to the 11 million people in Greece.
Which is better? For us to bite the bullet now and get our fiscal house in order by, for example, moving towards annual balanced budgets Or to wait until our debt becomes unbearable and there is no one to bail us out?
We are so big that if this ever happens and drastic measures have to be taken, much of the world will be drawn into the suffering along with us. It won’t be a pretty sight!

The Land of the Free and the Home of the Brave

Posted on July 5, 2015 by jackheidel

As we celebrate the 239^th anniversary of the signing of the Declaration of Independence in 1776, Americans have much to be thankful for. It is often said that the United States is the strongest, wealthiest and freest country the world has ever known. Although this may be somewhat of an exaggeration (see below), it is still indicative of how fortunate we are compared to the rest of the world.
As we celebrate our good fortune, we need to be acutely aware that our continued success as a great nation is not automatically assured. In fact we face a number of troubling and persistent problems which are not likely to disappear unless we take strong action to address them. For example we have:

A stagnant economy with only 2.2% annual growth since the end of the Great Recession. And the Congressional Budget Office predicts no speed up over at least the next ten years, based on current policy. Such slow growth condemns 20 million unemployed and underemployed citizens to unfulfilling lives, as well as lackluster pay raises for many more tens of millions.

Massive debt. Our public debt (on which we pay interest) is now at 74% of GDP, highest since the end of WWII, and predicted by the CBO to grow rapidly under current policies. When interest rates return to the normal 5% level, interest payments on the debt will skyrocket, making it much more difficult to fund all of the federal programs we depend on for our quality of life.

Increasing Income Inequality is real even if overhyped in the media. America is still a land of great opportunity but basic fairness demands that all citizens be able to share in our national abundance.

Threats from abroad. ISIS now controls much of Iraq, Syria and northern Africa and must be defeated. NATO needs our very strong support, all the more so with the Eurozone and European Common Market under increasing pressure from within.

As the strongest nation in the world we have much responsibility for continued world peace and prosperity. We can’t fulfill this role adequately unless our own internal fiscal and economic policies are in fundamentally sound shape.
Let’s be thankful for what we have and bear down hard to insure that we keep it!

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!

Could the U.S. End Up Like Greece?

Posted on June 30, 2015 by jackheidel

The whole world is watching while Greece decides between two unpleasant alternatives. Will it further tighten its belt in order to stay in the Eurozone? Or will it default on its massive debt, reintroduce the drachma and go through a severe recession likely accompanied by hyperinflation? Greece has put itself into this precarious position by accumulating a debt of 180% of GDP. It’s current situation would be much worse if it were not getting by with the low interest rate of 1.7% from the European Central Bank.
Compare Greece (see chart above) with the U.S. debt situation. Our current public debt (on which we pay interest) is 74% of GDP. This is the highest it has been since the end of WWII. And, thanks to Federal Reserve policy, we are now paying an historically low interest rate of 1.7% on this debt.
The problem is that (under current policy) our debt will keep growing larger and larger until, by 2080, it would reach the enormous level of 270 % of GDP. Our very low interest rate level of 1.7% will almost surely rise in the near future to a more normal level of 5%. As interest rates do begin to rise, and long before the debt reaches 270%, interest payments on the debt will have increased to a much higher level, crowding out other spending.
Notice that, according to the above chart, our debt will reach the Greek level of 180% around the year 2055. But with higher interest rates, it would be exceedingly reckless to assume that we won’t arrive at Greece’s currently perilous state much sooner than that.
Understanding that we have a very serious long term debt problem, it is imperative to begin to address it now, because the longer we wait:

the older our population gets
the higher the debt will rise
the less time we’ll have to phase in changes
the slower our economy will grow, and
the fewer tools we will have to fix it

The answer to the question in the title is: Yes, we could easily end up like Greece if we are foolish enough to postpone action on our own debt problem for much longer.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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