Tag Archives: Deficit spending

Why I Am Optimistic about President Trump

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I voted for Hillary Clinton last November. Not because I liked her program.  I was voting against Donald Trump.  He is crude, sleazy and a terrible narcissist.  I preferred John Kasich, Governor of Ohio, in the Republican Primary.  But he didn’t make it.  I voted for Mitt Romney in 2012 but he didn’t make it either.
The question now is whether or not the Trump Administration will effectively address our country’s two biggest problems, both of which are very serious and need urgent attention:

  • Slow economic growth, averaging just 2% per year since the end of the Great Recession in June 2009. Faster growth means a tighter labor market which in turn means more workers and higher wages. This in turn means less inequality. Furthermore, it is the United States’ dominant economic strength which assures world peace and stability. The Chinese economy, now half the size of ours, will catch us eventually. But stronger U.S. growth will delay this and enable us to cope with it better when it happens.
  • Massive Debt. The public debt of $14 trillion (on which we pay interest) is now 77% of GDP, (https://itdoesnotaddup.com/2017/01/31/trump-needs-a-wall-of-fiscal-discipline/) the highest since the end of WWII and steadily getting worse. With current low interest rates the debt is now essentially “free” money. But what will happen when interest rates return to normal historical levels? At this point interest payments on the debt will rise precipitously and become a huge drain on the budget. We can’t prevent this from happening but we can lessen the impact by acting now.

Will the Trump Administration take these two problems seriously?

  • For sure on economic growth. His re-election chances in four years depend largely on the fortunes of his base of blue-collar workers. His appointments at Treasury (Mnuchin), HHS (Price), and EPA (Pruitt) all support the tax reform and deregulation needed to get this done. I am confident that Trump will avoid a disastrous trade war.capture99
  • The debt. This is trickier because Trump has said he won’t touch Social Security or Medicare. My optimism is based on the fact that the Debt Ceiling will be re-imposed on March 16 at its level on that date. This will give Congress just a few months to raise the ceiling to a higher level. It is likely that the many fiscal conservatives in the House will insist, in return, for some sort of spending restraint such as a ten-year plan to balance the budget.

Conclusion. We’re not out of the woods yet. But there is a clear path showing the way forward.

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What, if Anything, Will Restrain Donald Trump?

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The Atlantic magazine has just released a remarkable essay written by the political commentator, David Frum, entitled, “How to Build an Autocracy.”  Says Mr. Frum, “Donald Trump will not set out to build an authoritarian state.  His immediate priority seems likely to be to use the presidency to enrich himself.  But as he does so, he will need to protect himself from legal risk.  Being Trump, he will also inevitably wish to inflict payback on his critics.  Construction of an apparatus of impunity and revenge will begin haphazardly and opportunistically.  But it will accelerate.  It will have to.”

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Let’s assume that Mr. Frum is correct that Trump’s top priority is to enrich himself.  What will stop him from doing this?  A recent column in the New York Times points out that:

  •  54% of registered voters in congressional districts represented by Republicans view Mr. Trump favorably compared with only 42% who view him unfavorably.
    In these same districts, 87% of registered Republicans view Mr. Trump favorably.
  • In other words, the Republican dominated Congress is unlikely to strongly oppose his sleazy and self-enriching behavior.

But there are other constraints on what he does in office:

  • As I said in a recent post in order for Mr. Trump to be reelected in 2020, he will need to substantially speed up economic growth in order to increase the wages of his key blue-collar supporters. He clearly wants to accomplish this.
  • On the other hand, the conservative Republican base, including its representatives in the House such as the Freedom Caucus, will simply not support huge increases in deficit spending for anything (except an emergency) including infrastructure, the military or unfunded tax cuts.
  • In fact, Rep Mick Mulvaney (R, SC), a deficit hawk, has been nominated to become the Trump Administration’s Budget Director. In March the debt ceiling will have to be raised. I expect the many fiscal conservatives in Congress to insist on significant fiscal restraint (e.g. a ten year plan to balance the budget) as a tradeoff for raising the debt ceiling.

Conclusion. Just because Republicans are tolerant of Mr. Trump’s personal behavior does not mean he can successfully ignore the strong Republican desire for fiscal restraint.

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The Divided States of America: Who’s at Fault?

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Frontline’s two part series, “The Divided States of America” makes the case that the divisive and hyper-partisan political atmosphere of the past eight years was caused primarily by the racially tinged reaction of the extremist Tea Party to the progressive policies of a forward looking, if inexperienced, black president.

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I think that Frontline has missed the most fundamental reasons for our current malaise, namely that:

  • Slow economic growth since the end of the Great Recession in June 2009 has caused great angst and resentment amongst middle-income, and especially blue-collar, workers who have stagnant incomes when they observe all around them the elite professional, managerial and financial classes who are doing so well.
  • Self-righteous attitude of progressives who refuse to accept that conservatives have legitimate, and maybe even superior, points of view on various issues.

For example:

  • National Debt. The public debt (on which we pay interest) is now 76% of GDP, the highest since the end of WWII, and is projected by the Congressional Budget Office to keep steadily getting worse without a change in policy. Right now, with ultra-low interest rates, our $14 trillion debt is essentially “free” money. But what is going to happen when interest rates go back up to more normal levels? It could easily be a new fiscal crisis, much worse than the financial crisis of 2008.
  • Inequality. Inequality has risen somewhat in recent years but slow growth is the real problem. What is especially lacking is new business investment to increase labor productivity. The best way to fix this is with tax reform (lower tax rates paid for by shrinking deductions) and a reduction in government regulation. But this would mean more “trickle down” economics. Horrors!
  • Improving Obamacare. The Affordable Care Act has increased access to healthcare but has done nothing to control costs. Most developed countries control the cost of healthcare with a “single payer,” government run monopoly. But this is anathema to many Americans who neither want to give up personal choice nor want to forgo the innovation which a free-market consumer-driven healthcare system provides.

Conclusion. The driver of our currently divisive political climate is a deep chasm between the fundamental beliefs of the two different sides. How can this deep division be overcome short of a new crisis which pulls both sides together?  A very difficult question.

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What Will Trump Do?

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I did not vote for Donald Trump because of his often crude remarks and sleazy behavior. But I am now cautiously optimistic about the prospects for his presidency based on the quality of his nominees for important government posts.  Like many of his voters, I “take him seriously but not literally.”

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Here is what I think he will do:

  • Economic Policy. He will try to speed up economic growth, well above the average 2.1% annual GDP growth of the past 7½ years. This can be accomplished with tax reform (lowering tax rates paid for by shrinking deductions), regulatory reform (including paring back Dodd-Frank and the ACA), immigration reform and tougher trade policies. Faster growth benefits the whole country and especially the blue-collar workers who voted for him.
  • Improving life in the inner cities. K-12 education is a disaster in many inner cities and Betsy DeVos will be a reformer in the Education Department. Ben Carson grew up in public housing and is an excellent choice for HUD.
  • Foreign Policy. Mr. Trump wants changes from China on currency and trade practices. He also wants more cooperation from Russia in fighting terrorism. He wants our NATO partners to bear a bigger share of their own defense. His Secretary of State designee, Rex Tillerson, supports arming Ukraine against Russia and also supports the TPP trade agreement with Asia. This all sounds good to me.
  • Fiscal Policy. My biggest concern at this point is our national debt, now 76% of GDP (for the public part on which we pay interest) which is historically high and steadily getting worse. The House Republicans are serious about shrinking deficit spending and hopefully Mr. Trump will support their efforts.

Conclusion. Donald Trump has a highly unconventional (but very effective) style of communication. If it leads to progress in addressing our biggest problems as above, then he’ll have a very successful presidency.

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Election Day 2016: The Fourth Anniversary of this Blog

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I have now been writing this blog for four years, beginning right after the presidential election of 2012. I was a candidate in the May 2012 Republican Primary for the 2nd Congressional District of Nebraska.  I campaigned on the platform to “eliminate the deficit.”  I lost to the incumbent Lee Terry who was in turn replaced in office by the Democrat Brad Ashford in 2014.

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The overriding theme of my blog is “how to restore fiscal responsibility to our national government.”   I discuss two fundamental and related issues:

  • Massive Debt now 75% of GDP, the highest level since right after WWII, and predicted by the Congressional Budget Office to keep rising steadily under current policies.
  • Slow Economic Growth averaging just barely 2% per year since the end of the Great Recession in June 2009. Although the unemployment rate is down to a respectable 4.9%, the labor participation rate is also lower than usual. Faster growth would mean more jobs and better paying jobs. It would also mean more tax revenue to shrink our annual deficits.

How should these problems be addressed?  In briefest outline:

  • Balanced Budget Amendment to the Constitution. This is a drastic measure but I see no other way to get the job done. The pressure on Congress is always to create new programs and spend more money, not less. A BBA could be designed in a flexible manner to allow emergency overrides. It could also be phased in by, for example, having an effective date three years after ratification. It so happens that 28 states (out of 34 needed) have now called for a Constitutional Convention to propose such an amendment. (http://bba4usa.org/)
  • Tax Reform, lowering rates for individuals and corporations, paid for by shrinking deductions, would do wonders for encouraging business investment and entrepreneurship, as well as encouraging American multinational companies to bring their foreign earnings back home for reinvestment.

Conclusion. Much more can be done but this would be a very good start.

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Fiscal Irresponsibility: Our Country’s Most Fundamental Problem

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As a fiscal conservative, I am worried about our nation’s future. The public debt (on which we pay interest) is now 75% of GDP, the highest level since right after WWII, and growing steadily.  Furthermore, our economy has just barely recovered from the Great Recession and is expanding too slowly to revive widespread prosperity.  Neither of the two main presidential candidates, Hillary Clinton nor Donald Trump, is talking seriously about our huge debt and neither has a credible plan to boost economic growth.

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The above chart from the Heritage Foundation is a vivid way of illustrating this problem:

  • Already entitlement spending (Social Security, Medicare and Medicaid), and interest payments on our debt, use up 2/3 of all federal tax revenue. And spending on each of these entitlement programs is growing faster than the economy as a whole. Interest rates will eventually rise from their current rock bottom level. When this happens, interest payments on our growing debt will increase rapidly.
  • In 2032, just 16 years from now, spending on entitlements and interest payments is projected to consume all federal tax revenues, assuming a steady 18% of GDP level for tax revenue.

There are three possible ways to offset this bleak picture:

  • Speed up economic growth. This should, of course, be possible but it will take a major shift in thinking to accomplish.
  • Increase federal tax revenue. Suppose that federal tax revenues were raised by 1% of GDP, or $180 billion per year. This would at least temporarily put our debt on a downward path (as a percentage of GDP). But it would be very hard to accomplish politically. Mrs. Clinton, for example, has proposed raising taxes by $100 billion per year which she wants to spend entirely on new programs rather than reducing our annual deficits.
  • Reform entitlement programs. This is by far the best way to address our debt problem, and the only effective way in the long run.  But, again, it will be very hard to accomplish politically.

Conclusion. If the U.S. cannot get its debt and slow growth problems under control, it risks losing its status as the world’s major superpower. This would be a calamity for both our own national security and the peace and stability of the entire world.

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Donald Trump Needs a More Positive Message

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As regular readers of my blog posts know, I am not enthusiastic about either of our two main presidential candidates because neither of them has a good grasp of our two biggest economic problems which are:

  • Slow economic growth, averaging just 2% per year since the end of the Great Recession in June 2009. Faster growth would solve or alleviate many other problems, especially by creating more new jobs as well as delivering faster wage growth for all middle- and lower-income workers.
  • Massive debt now at 75% of GDP, the highest it has been since right after WWII, and projected by the Congressional Budget Office to get steadily worse unless big changes are made in spending and tax policies. Such major changes are difficult to make without presidential leadership.

Hillary Clinton promises “equitable” growth but her policy proposals will lead to a big increase in spending (bad idea) on projects of dubious value in speeding up economic growth. Donald Trump would hurt the economy with immigration controls and trade restrictions.  His proposal for lower tax rates (good idea) needs much improvement to avoid increasing annual deficits.
capture40Mr. Trump’s biggest problem, however, is his negative message about life in America today. Yes, we need stronger border security but we don’t need a Fortress America.  As the American Enterprise Institute has just reported, worker satisfaction is greatly improved since 2009 and workers are now much less anxious about job security than just a few years ago.
There is a really good way for Mr. Trump to sound a more positive note.  He could very easily take up the major themes of the Republican House Plan, “A Better Way” for solving America’s major economic problems.
Conclusion. There is an overwhelming desire for change in America, for new leadership which breaks out of the corruption, cronyism and elitism so rampant in Washington DC today.  But Americans are natural optimists and want a leader who can look forward to a bright future for our country.

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Why We Should Be Deeply Worried about Our National Debt

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My last post is highly critical of the economist and New York Times columnist, Paul Krugman, for encouraging massive new deficit spending to stimulate our under-performing economy.
Debt and the slow growth of our economy are the two main topics of this blog which I have now been writing for almost four years.  How to speed up growth is a complicated and highly charged political issue about which reasonable and well informed people can differ.  However avoiding excessive debt is to me a moral issue whose resolution should not be that difficult, at least in a conceptual sense.
Capture2 I have often used the above chart from the Congressional Budget Office to illustrate our debt problem because it clarifies the problem so vividly.  Here are its main features:

  • Our public debt (on which we pay interest), now about $13 trillion, is 75% of GDP, the highest since right after the end of WWII. And it is projected to keep getting steadily worse under current policy.
  • Note the decline in the debt from the end of WWII until about 1980. This doesn’t mean that the debt was actually paid off but rather that it shrank as a percentage of GDP as the economy grew fairly rapidly during this time period.
  • From 1980 – 2008 the debt level fluctuated and increased somewhat but did not get badly out of control.
  • Debt shot up rapidly with the Great Recession and has been continuing to grow ever since.
  • The current GDP of our economy is about $19 trillion. At a current growth rate of 2.1%, this adds $400 billion of GDP per year. This means that a $400 billion deficit for 2016 would stabilize the public debt at 75% of GDP. But our 2016-2017 deficit is projected to be almost $600 billion (and rising). This is not good enough!

Conclusion. In order to begin to shrink the size of the public debt, it is imperative that annual spending deficits be reduced to well below $400 billion per year. This will be difficult for our political process to achieve but it is the only way to avoid a new and much worse financial crisis in the relatively near future.

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Paul Krugman’s Great Crime: Stealing from Our Nation’s Future

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New York Times columnist Paul Krugman is perhaps the most ardent Keynesian economist in the U.S. today. Let’s agree that Mr. Krugman is a very intelligent and articulate fellow.  He is a Nobel Prize winner and undoubtedly has made important contributions to economics. But he has the absolutely nutty idea that extreme deficit spending not only doesn’t hurt our economy but can actually be beneficial.  His column, “Time To Borrow”  in yesterday’s NYT is a perfect example of this dangerous idea.
Capture31Here is the essence of his thinking:

  • Our national debt of $19 trillion is just a big scary number. Actually just our public debt alone of $13 trillion (on which we pay interest) is 75% of GDP, the highest since the end of WWII, and is projected (by the CBO) to steadily become much worse.  
  • Federal interest payments are only 1.3% of GDP, low by historical standards. Just lock in repayment with 30-year inflation protected bonds, yielding .64% interest. Okay, suppose we can lock in very low interest payments on our current debt and therefore just borrow away oblivious to total debt for the next 30 years. In 2046 I expect to be gone but my children and grandchildren will still be around. Why should they be stuck with paying off or refinancing our own extravagant debt at likely much higher interest rates?
  • There are pressing infrastructure problems all over the country which need fixing now. For example, in Florida, green slime infests beaches because of failure to upgrade an 80 year old dike. The answer is to let Florida voters decide if they want to issue bonds for this project and pay them off with state tax revenue. Nebraska, for example, has decided to raise its state gas tax by 6 cents/gallon in order to pay for infrastructure upgrades.

 

Conclusion. The U.S. is currently in a huge fiscal bind with massive debt and continuing large annual deficits. It is extremely reckless to continue even current deficit spending, let alone increasing it, for anything less than a true national emergency.  Infrastructure repair, for example, is an important but routine need which should be paid for out of current tax revenue.

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The High Cost of U.S. Health Care

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As I indicated in my last post, ”Entitlement Spending and the National Debt,” our national debt is much too high and steadily getting worse.  Furthermore, it is entitlement spending, especially Medicare, which is the fundamental driver of our increasing debt.  If we don’t solve this problem relatively soon, we will have another financial crisis on our hands, much worse than the last one in 2008.  When interest rates go up, as they will sooner or later, then interest payments on our accumulated debt will rise precipitously and threaten to bankrupt the nation.
CaptureThe only effective way to control Medicare costs, however, is to control the overall cost of healthcare in the U.S., i.e. for private healthcare.  The above chart shows the nature of this problem.  Right now we are spending 17.4% of GDP on healthcare, public and private, and this is predicted to reach 19.6% of GDP by 2024.  This is almost twice as much as for any other developed country.
Capture6The Omaha World Herald had an article on Sunday, “Bending the Curve,” purporting to show that cost increases for total national healthcare spending are dropping (see just above).  The problem is that these supposedly low price increases in recent years are still twice the rate of inflation which is now averaging under 2% per year.  This means that even 4% – 5% price increases per year are much too high and need to be curtailed even further.
Capture10The fundamental reason why U.S. healthcare is so expensive is that Americans do not have enough “skin in the game.”  The above chart shows that our direct out-of-pocket costs for healthcare have been steadily dropping for the last fifty years as the role of health insurance has expanded.  This means that we simply don’t have enough personal incentive to hold down healthcare spending on our own.
Conclusion: We have to control entitlement spending, especially for Medicare, to get our national debt under control.  But this can only be done by limiting the steep spending increases in overall healthcare, public and private.  How will we be able to do this?  Be patient, we’re getting there!

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