The Slow Growth Fiscal Trap We’re Now In.

Posted on March 3, 2015 by jackheidel

Our economy has been growing very slowly, about 2.2% per year on average, since the end of the Great Recession in June 2009. The Congressional Budget Office predicts that this slow growth will continue indefinitely, although with a brief respite of 2.9% growth in 2015 and 2016. The American Enterprise Institute predicts an even lower, less than 2% growth rate, going forward.
Here’s the essence of the overall problem:

Slow growth keeps the unemployment level high and also means minimal raises for employed workers The resulting economic slack leads to
Low Inflation. But low inflation in turn means that the Federal Reserve can try to increase growth with quantitative easing and at the same time maintain
Low Interest Rates to encourage borrowing. But an unfortunate side effect of low interest rates is that Congress can borrow at will and run up huge deficits without having to worry about paying interest on this “free” money. This leads to:
Massive Debt. But what is going to happen when inflation does take off which is bound to happen eventually? Then the Fed will be forced to raise interest rates quickly and we will be stuck with huge interest payments on our accumulated debt. When this happens, interest payments plus ever growing entitlement spending will eat up most, if not all, of the federal budget. This will almost inevitably lead to a severe
Fiscal Crisis.

FLOW CHART

Slow Growth->Low Inflation->Low Interest Rates->Massive Debt->Fiscal Crisis

Of course, there are alternative scenarios. Congress might become more responsible and cut spending and/or raise taxes. We might luck out, so to speak, with such prolonged slow growth that inflation stays low indefinitely and interest rates never increase. But slow growth is not pain free. There are 20 million unemployed or under-employed Americans who want to work and whose lives are much less satisfying as a result of being idle.
Isn’t it obvious that the best response to this slow growth fiscal trap is to adopt policies to make the economy grow faster? There are lots of things that could be done, many of which I addressed in my last post (https://itdoesnotaddup.com/2015/03/01/will-middle-class-economics-lift-us-out-of-secular-stagnation/) so I won’t repeat them here. But I’ll be coming back to them again and again in the future!

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!

The President’s Budget: Stabilization of the Debt Is Not Enough!

Posted on February 5, 2015 by jackheidel

President Obama has proposed a $3.99 trillion budget for next year, a $340 billion increase from the current 2015 budget year. As shown in the charts below, it projects deficits of about 2.6% over the next ten years equal to its (optimistic in comparison to the CBO) growth projections for GDP. This means that the debt would stabilize at about 73% of GDP. And, of course, achieving his predicted stabilization of debt will require big tax increases over this ten year period.
Here are the major weaknesses in the budget:

Sequestration. The President declares that “I’m not going to accept a budget that locks in sequestration going forward.” Everyone deplores the mindlessness of sequestration but the only responsible alternative is to make targeted cuts throughout the budget. The President makes no attempt to do this. And he wants to add spending for various new education and research initiatives, as well as an expanded Earned Income Tax Credit for low-income workers.

Infrastructure. Spending over the next six years would increase by $238 billion to be raised from a 14% repatriation tax on the $2 trillion in foreign earnings held overseas by American multinational corporations. The problem is that any repatriation tax should be tied in with overall corporate and business tax reform, exchanging lower tax rates in return for closing loopholes and deductions, in order to make U.S. business taxes competitive with those of other countries. Fundamental tax reform is the key to getting our economy growing faster.

Entitlements. The President’s budget does not even mention the biggest threat to long-term fiscal sustainability, namely the rapidly increasing spending for Social Security, Medicare and Medicaid. It will be very difficult to make progress on this critical issue without presidential leadership.

Stabilization of the Debt. The President’s budget, with quite optimistic revenue and growth projections, stabilizes the debt over ten years. But this is not nearly good enough. To be satisfied with a public debt of 73% of GDP indefinitely into the future is simply too risky. What’s going to happen when we have another financial crisis, as we surely will? How are we going to cope with our growing rivalry with China with very little budget flexibility? And one can imagine any number of other possible emergencies which might occur. Putting the debt on a clear downward trajectory is the only prudent thing to do!

It’s Paul Krugman Who Is Being Irresponsible!

Posted on February 3, 2015 by jackheidel

The New York Times columnist, Paul Krugman, writes provocatively on fiscal and economic issues and is well-known as a liberal icon. Usually I ignore his diatribes. But his column yesterday, “The Long-Run Cop-Out” goes way overboard.
I will refute several of the statements from this column.

“Think about it: Faced with mass unemployment and the enormous waste it entails, for years the beltway elite devoted all most all its energy not to promoting recovery, but to Bowles-Simpsonism – to devising “grand bargains” that would address the supposedly urgent problem of how we’ll pay for Social Security and Medicare a couple of decades from now.” Worrying about our enormous and rapidly increasing national debt, does not mean ignoring our sluggish economy and the high unemployment it causes. The way to increase economic growth is to enact broad based tax reform by lowering tax rates, offset by closing loopholes and limiting deductions. This will further boost the economy in the same way that lower gasoline prices is already doing.

“Many projections suggest that our major social insurance programs will face financial difficulties in the future (although the dramatic slowing of increases in health costs makes even that proposition uncertain).” Healthcare costs dropped to 4.1% in 2014 but this is still more than double the inflation rate of 1.7%. This isn’t nearly good enough.

“Why, exactly, is it crucial that we deal with the threat of future benefit cuts by locking in plans to cut future benefits?” The point is to protect benefits, not curtail them. If we act now, to increase revenue and/or slow down the growth of entitlement spending, then we won’t have to cut future benefits.

“So why the urge to change the subject (from austerity) to structural reform? The answer, I’d suggest, is intellectual laziness and lack of moral courage.” $6 trillion added to our debt in the last six years is profligacy, not austerity. It is immoral to burden future generations with such massive new debt.

“In today’s economic and political environment, long-termism is a cop-out.” Preparing for the future is just plain common sense. Should we ignore festering problems like global warming, illegal immigration and increasing poverty until they get much worse? Of course not. We should address these problems now and get our debt under control at the same time.

Progress on Medicaid Reform

Posted on January 29, 2015 by jackheidel

It is widely understood that the rapid increase in spending for entitlements (Social Security, Medicare and Medicaid) is the main driver of our debt problem. Anything that can be done to get spending for these programs under control is of great value.
The problem with Medicaid is that a fixed percentage of each state’s costs is paid for by the federal government. The more a state spends, the more that is contributed by the federal government which is a disincentive for states to control their own spending. From 1989 to 2013, the share of state budgets devoted to Medicaid rose from 9% to 19%. This upward trend is a problem for both state and federal government and is clearly unsustainable.
One way to change the spending incentive is to turn Medicaid into a block-grant program whereby the federal government contributes a specific amount of money to each state each year and gives states more leeway in designing their own programs. States would then have a much bigger incentive to hold down costs and the flexibility to be able to do it.
Progress is being made in this direction with the use of waivers:

Rhode Island received a waiver in 2009 to try out various cost-saving measures such as wellness programs, co-payments, etc. It has been quite successful and very well received.
Last year Pennsylvania agreed to expand Medicaid to an additional 500,000 people along with a waiver allowing people above the poverty line to be charged premiums of up to 2% of their household income as well as being charged an $8 copayment for use of emergency rooms.
Now Indiana (http://www.wsj.com/articles/indiana-governor-to-expand-medicaid-coverage-1422371729) has agreed to an expansion with a waiver under which beneficiaries above the poverty level would be charged premiums of 2% of income and would be locked out of benefits for six months if they fall behind in their payments.
Additional states such as Idaho, Wyoming, Utah, Tennessee, Alabama and Florida are also considering Medicaid expansions and likely will be influenced by the possibility of receiving similar waivers.

Waivers are not as cost effective as block-grant funding but they are an improvement over the existing one-size-fits-all federal rules. If more individual states are able to show that waivers really do work to reduce costs, this will increase the likelihood of implementing a block-grant system.

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!

What Will It Take to ‘Fix the Debt’?

Posted on January 22, 2015 by jackheidel

I have recently become a volunteer for the national bipartisan organization, Fix the Debt. It is the outreach arm for the Washington think tank, Committee for a Responsible Federal Budget, which is an offshoot of the Simpson-Bowles Commission from several years ago.
As such, I give presentations to local civic organizations about our national debt and what needs to be done to get it under control. Typically the audience will readily appreciate the seriousness of our debt problem. What they want to talk about are practical ways to address it. They have their own ideas and want to know what I think as well. My first message is that we don’t have to pay off the debt or even balance the budget going forward. Realistically we need to shrink our annual deficits in order to put the debt on a downward course as a percent of our growing economy, as shown in the chart just below.

It will be a huge challenge to accomplish even this! Here are my ideas, in very general outline, on how to get this done:

Entitlements (Social Security, Medicare and Medicaid) are the biggest single problem because our population is aging so fast. Furthermore, in order to control the growth of Medicare and Medicaid, we have to do a much better job of controlling the overall cost of healthcare in the U.S. For example, even though healthcare costs slowed down to an increase of only 4.1% in 2014, this is still more than twice the rate of inflation!
The second thing we need to do is to make our economy grow faster than the roughly 2.3% growth we have achieved since the end of the Great Recession. The main way to get this done is through broad-based (and revenue neutral) tax reform at both the individual and corporate levels, by reducing tax rates, paid for by closing loopholes and limiting deductions.
Finally, there is enormous waste and inefficiency in the federal budget, with huge redundancy and overlap of programs between different federal departments. Responsibility for such programs as education, community development, transportation and social welfare, for example, should be returned to the states with block-grant funding to replace rigid federal control.

I have discussed each of these major reform ideas in much detail in previous blog posts and will continue to do so. As large as our fiscal problems are, I remain optimistic that they can and will be successfully addressed.

Where Should the New 114th Congress Focus Its Attention?

Posted on January 6, 2015 by jackheidel

The two main themes of this website are how to boost economic growth and how to get our national debt under control. Faster economic growth will put more people back to work by creating more jobs. Faster growth will also bring in more tax revenue and therefore potentially reduce deficit spending.
The latest monthly unemployment rate, 5.8% for November 2014, is much higher than it should be almost six years after the end of the Great Recession in June 2009. The best thing that Congress could do to boost economic growth is to adopt broad-based tax reform, lowering tax rates in a revenue neutral way by closing loopholes and limiting deductions. I’m still in favor of doing this but I no longer consider it to be the top priority for the following reason.
The huge drop in the price of gasoline is already providing a big economic stimulus. At the current price of $2 per gallon, the average American family will save about $750 per year in driving expenses. This is even more relief than a tax cut would provide. The economy has already picked up steam in 2014 and is predicted to grow at the rate of 3% in 2015. This will keep the unemployment rate decreasing steadily throughout 2015 and beyond, which represents much progress.
It’s now time for Congress to focus more strongly on putting the debt on a downward path. This can only be done by shrinking our annual budget deficits well below the $483 billion deficit for the last (2014) budget year. As the above chart from Fix the Debt shows, our current fiscal path leads inexorably to a growing debt which is completely unsustainable in the long run. Annual deficits will have to be at least cut in half to be able to turn the debt trajectory downwards.
Getting this done will require much dedication and hard work by Congress. Many programs will have to be eliminated. Surviving programs will need to operate more efficiently. The entitlement programs of Social Security, Medicare and Medicaid will have to be greatly tightened up.
Is Congress up to this task? The future of our country depends on it!

We Agree There Is a Huge Debt Problem! How Do We Fix It?

Posted on December 30, 2014 by jackheidel

Yesterday I gave my second “Fix the Debt” presentation, this time to the Greater Omaha Kiwanis Club. The main slide (just below)
is all they needed to appreciate the magnitude of the problem. Their main interest was “How do we fix it?” They listened politely to a bipartisan list of possible actions:

Policies that grow the economy
Health care cost containment
Social security reform
Defense spending cuts
Other spending cuts
Tax reform and tax expenditure cuts
Budget process reform

Then one member asked, “How about a balanced budget amendment?” and this became the focus of the discussion. A balanced budget amendment going forward would not pay off the debt but would stop adding to it. It would shrink the debt over time as a percentage of GDP as the economy continues to grow. This is the best we can do in a practical sense and represents a satisfactory solution. There are lots of problems, however, associated with passing a Balanced Budget Amendment:

First of all, it will be difficult to accomplish. It requires approval by a 2/3 vote of each house of Congress and ratification by ¾ of the states. This means that it could be stopped by just 13 state legislatures.
How would a BBA be enforced? By having the Supreme Court step in and require specific actions to raise taxes or cut spending? This seems problematic.
There would have to be a provision for override in the case of emergency (war or other catastrophe). A 2/3 vote by each house of Congress would be a logical way to handle a situation like this. But such a system could easily be abused.

The goal is to significantly shrink the debt as a percentage of GDP over time as the economy grows. This does not require a balanced budget but only that annual deficits be lower on average than annual growth of the economy. Representative Paul Ryan’s “Roadmap” plan, for example, would shrink the debt by 30% over a 20 year period without a single annual balanced budget. The important thing is to shrink the debt as a percentage of the economy, and to get going on this as soon as possible. If it requires a somewhat rigid amendment to get this done, then that’s what we need to do!

Status Quo on the Budget Is Not Good Enough II. Look at the Big Picture!

Posted on December 28, 2014 by jackheidel

In my last post, “Status Quo on the Budget Is Not Good Enough,” I discussed a report from the outgoing chair of the Senate Budget Committee, Patty Murray (D-WA), and explained how it epitomizes the lack of progress made on the massive debt problem which has developed since the Great Recession of 2008 -2009.
The basic problem is that Senator Murray’s analysis simply does not recognize the seriousness of our debt problem as shown in the above chart. Right now our public debt (on which we pay interest) is “sitting” at 74% of GDP for a year or two, before it continues its rapid increase. This projection assumes an historically “normal” growth rate of 3% and no new recessions, neither of which assumption is assured. It also assumes that the sequester budget cuts and new top tax rate of 39.6% stay in effect. In other words it is a best case scenario based on current policy.
Breaking it down, the debt will continue to increase because annual deficits will continue to exceed the rate of growth of the economy. The main driver of these increasing deficits is the cost of the health care entitlements of Medicare and Medicaid. Medicare costs will increase rapidly because of the aging of the American people. Medicaid costs will increase rapidly because: 1) more low-income people are being covered by the ACA and 2) since the recession there are more low-income people to be covered. I certainly support expanded healthcare coverage but we have to figure out how to pay for it!
How do we contain the increasing costs of Medicare and Medicaid? We do it by controlling the overall rapid growth (at twice the rate of inflation) of healthcare costs in general, i.e. for private healthcare. How do we do this? See a couple of my recent posts either here or here.
Senator Murray, along with many other progressives, argues that we need more deficit spending in order to stimulate the economy and create new jobs. More jobs are badly needed but more deficit spending is the wrong way to get them. Then how? With tax reform among other things.
Based on the outcome of the 2014 elections, I am optimistic that something along the lines of what I have just described will be tried by the next Congress. We’ll soon find out!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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