Tag Archives: deficit

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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The Importance of Shrinking Our Debt and How to Do It

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President-elect Donald Trump is on record as favoring tax and regulatory reform in order to speed up economic growth and I have made it clear that this can be accomplished without increasing our debt.
But what is really needed is to grow our economy faster and actually shrink our debt at the same time.  It will be very difficult, essentially impossible, to accomplish this with growth alone or even by raising taxes because the magnitude of our debt, 76% of GDP and rising, is so great.

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There is really only one way to begin to shrink the debt and this is to get entitlement spending under control.  The above chart shows that, without major changes, by 2032 all tax revenue will go towards healthcare, Social Security and net interest. Here is what needs to be done:

  • Social Security is already paying out $100 billion per year more than it collects in payroll taxes. Its Trust Fund will run dry in 15 years unless major changes are made and all benefits will drop by about 25% when this happens. We need to either increase the eligibility age for full benefits and/or raise the income cap on payroll taxes. These changes can be phased in but the sooner we get started the less painful it will be.
  • Medicare is an even bigger problem than Social Security. Either we have government rationing, i.e. “death panels,” or else rationing by price meaning some form of premium support. This simply means that we will all have more “skin in the game,” in the sense that we will all have a financial incentive to minimize our own healthcare expenses.
  • Medicaid should be block granted to the states so that the federal government is not obligated to a fixed match for all state Medicaid expenses. Again, cost control is the object of such a change.

Conclusion. It needs to be emphasized as strongly as possible that the reason for stringent cost control of entitlement programs is to preserve them for posterity, not destroy them.  Our prosperous way of life is severely threatened by our unwillingness to recognize this problem.

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Bush Failures Led to Obama and Obama Failures Led to Trump

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As I have previously stated, I voted for Hillary Clinton because Donald Trump is so crude and sleazy even though our country will now greatly benefit from the change which Mr. Trump represents.  This is the way the political process often works.

capture79 Consider that after eight years of George Bush we had:

  • Ongoing war in Iraq and Afghanistan, of which the Iraq war was an unnecessary mistake.
  • $2.5 trillion of additional debt, even after Mr. Bush started out with a budget surplus, compliments of Bill Clinton.
  • An expensive new Medicare Part D prescription drug plan which just makes overall Medicare even less affordable than it already is.
  • The Financial Crisis of 2007-2008 which the Bush Administration could have seen coming if they had been more vigilant.

 

Under such political circumstances, the 2008 election of the Democratic nominee, Barack Obama, over the Republican nominee, John McCain, was almost inevitable. But then in the next eight years we have experienced:

  • Slow economic growth averaging only 2% per year, ever since the end of the Great Recession in June 2009. The unemployment rate has fallen to 4.9% but there is still a lot of slack in the labor market which holds wages down. This is the main reason for the huge support Mr. Trump had from white blue-collar workers in the election.
  • Massive debt, now 76% of GDP (for the public debt on which we pay interest), the highest since right after WWII and double the debt in January 2009 when Mr. Obama entered office. Such a high debt level means greatly increased interest payments as soon as interest rates go up which they are likely to do anytime. The high annual deficits contributing to the debt mean little budget flexibility for new programs.

Conclusion. Democrats like to say that slow economic growth is “the new normal” which can only be overturned with budget busting new fiscal stimulus. This is a pessimistic point of view which refuses to consider other alternatives.  This is what led to Ms. Clinton’s defeat on November 8.

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We Need Fundamental Change and Now We’re going to Get It!

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I want to emphasize that I voted for Hillary Clinton on Tuesday because Donald Trump has such a sleazy and mercurial personality. But Mr. Trump was clearly the change candidate and we need change big time.  His strongest base of support is the white working class which has not really recovered from the Great Recession of 2008-2009 and he will surely try to help out these people.

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Here are the changes we need in order of importance:

  • Grow the economy faster. Tax reform, individual and corporate, and regulatory reform are what are most needed. Mr. Trump and the House Republicans are in rough agreement on both of these major initiatives and hopefully the new Republican led Senate will go along. The best kind of tax reform means to lower tax rates and shrink deductions enough to avoid losing tax revenue. This can be accomplished if a real effort is made to do it this way.
  • Begin to shrink our massive debt. This can only be done by major entitlement reform, meaning to control the costs of Social Security, Medicare and Medicaid. Medicare should be transitioned over from a single payer system to a premium support system, consistent with a reformed Affordable Care Act. Healthcare costs can only be contained by giving consumers more skin in the game, meaning higher deductibles supplemented with health savings accounts.
  • More assertive foreign policy. Worldwide peace and stability depend on our own economic and military strength. Right now China, Russia and Iran think they can push us around. President Trump will not let this happen.
  • Trade and immigration policy. Most knowledgeable people agree that international trade is generally beneficial. We simply have to do a better job of retraining American workers who lose their jobs to foreign competition. The key to immigration reform is tougher border security plus an effective guest worker visa program.

Conclusion. The Republican House of Representatives has an excellent plan, “A Better Way,” for American economic, fiscal and social renewal and Mr. Trump is largely supportive of it. This augers well for fundamental progress in the next four years.

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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 Policy after the Election

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As the presidential election tightens and the likely margin of victory for either candidate continues to shrink, it becomes ever more apparent that we need a bipartisan approach to solving our most basic problems.  My last post discusses the need for fundamental tax reform to get our economy growing faster to create more and better paying jobs.  Today I remind my readers of the need for better fiscal policies as well to address our massive and steadily deteriorating debt problem.
As the American Enterprise Institute,  among many other think tanks, makes abundantly clear, we are spending more and more of our federal budget on entitlements  as opposed to all of the many other federal responsibilities which are lumped together as discretionary spending.  In other words, the only way to fix our deficit and debt problems is to achieve better control over entitlement spending.

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AEI has some excellent ideas on how to do this:

  • Social Security should move towards providing a universal flat benefit, set at the federal poverty level, for all U.S. residents aged 65 and older. Social Security would then become a guarantee against poverty in old age rather than a scheme for partially replacing pre-retirement earnings for middle and higher earning households.
  • Health Care. The Affordable Care Act should be replaced with a less regulated system (i.e. no mandates). The federal tax preference on employer plans could be limited to the cost of catastrophic (high deductible) insurance plus a contribution to health savings accounts. Households without employer coverage would receive a comparable tax credit.
  • Medicare would be converted into a premium support system with a fixed level of support comparable to that provided by employers.
  • Medicaid would be converted into a block grant program for the states based on the fixed, per capita costs for enrolled populations.
  • Other Safety-Net Programs should emphasize work as the key to improved economic prospects plus greater state control over resources in order to encourage innovation.

Conclusion. It should be emphasized as strongly as possible that the purpose of entitlement reform is to preserve and strengthen entitlements, not to weaken or destroy them.  Without such action we are headed for a much worse financial crisis than the one we had in 2008-2009 which will put all government social programs at risk.

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How to Get Our Country Back On Track

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In my last two posts, here and here, I have said that I like some of Donald Trump’s policy ideas but he is too personally repugnant for me to support and vote for.  Hillary Clinton is morally less objectionable than Mr. Trump but her economic policy proposals are unlikely to have much success.
capture66The best hope for our country is to keep the Republicans in control of the House of Representatives.  They have put together an excellent plan, “A Better Way,” for reviving the American economy and boosting the American spirit.  Its main principles are:

  • Poverty. Every capable person is expected to work or prepare for work. Poverty fighting programs will be directed to get people back on their feet. The poor will have more opportunities to succeed at every stage.
  • National Security. It is a top priority to defeat radical Islamic extremism. We must restore American influence, advance free enterprise and expand the community of free nations.
  • The Economy. We need to take a smarter approach that cuts down on needless regulations while making the rules we do need more efficient, especially for our small businesses.
  • The Constitution. Agencies and bureaucracies should be subject to more scrutiny from Congress. Give Congress more say – and the final word – over what is being spent and why it is being spent.
  • Health Care. Individuals should have more control and more choices in order to improve quality and lower costs. No one should have to worry about having coverage taken away regardless of age, income or medical conditions.
  • Tax Reform. The tax code should be simpler, fairer and flatter while remaining progressive. It should be constructed to create jobs, raise wages and expand opportunity for all Americans.

Conclusion. These principles are widely supported by almost all Republicans in Congress and are more important than specific differences on immigration, trade, or entitlement policy.  Their serious consideration depends upon returning a Republican controlled House in 2017.

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How Will Hillary Clinton Do on the Economy?

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With Donald Trump dropping in the polls, whirling out of control and unwilling to withdraw from the race, my attention now turns to Hillary Clinton and what she is likely to do as President. I divide this discussion into good news and bad news.

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First the good news:

  • A leading democratic economist, Larry Summers, is on record as strongly supporting faster economic growth.  However, he seems to think that public investment (i.e. more public spending) is the best way to achieve this.
  • The House of Representatives is likely to remain in Republican hands after the 2016 election, even if the margin of control is reduced. The Republican House has an excellent plan to boost economic growth and presumably will be able to bargain for pro-growth policies.

Unfortunately, the current Clinton tax plan is anti-growth. As analyzed by the Tax Foundation, her plan would:

  • Give individuals with an AGI over $5 million a 4% tax surcharge. Taxpayers with an AGI of $1 million or more would pay a 30% minimum tax (Buffett Rule). Carried Interest would be taxed at ordinary income rates. Short term capital gains would be taxed at higher rates up to 39.6%. Most itemized deductions would be capped at a tax rate of 28%. Taxes on small businesses and startups would be reduced.
  • Lead to a 2.6% overall lower level of GDP which would lead to lower levels of wages and jobs.
  • Raise $1.4 trillion in new revenue over the next decade on a static basis which would only really produce $663 billion because of slower growth.
  • Devote all of the new revenue to new spending programs and therefore achieve no deficit reduction and more likely an increase in annual deficits.

Conclusion. The Clinton tax plan has some attractive features such as reducing taxes on small business. But overall it would slow economic growth in the name of reducing income inequality.  A Republican House in the new Congress would likely be able to bargain for a much better plan.

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The Obama Economic Record

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The readers of this blog know that I focus on what I consider to be the two biggest problems affecting our economy: 1) slow growth averaging just 2% per year since the end of the Great Recession and 2) our massive debt now equal to 75% of GDP (for the public part on which we pay interest) and predicted to keep growing steadily under current policy.
I have also made it clear that I am not pleased with the economic policies of either of the two main candidates for president, Hillary Clinton or Donald Trump.  Whichever one of them is elected, our best hope for the future is that she or he will have to work with the Republican House of Representatives which has an excellent plan, “A Better Way,”  for renewal.
capture71But, of course, the next president will take up where Barack Obama has left off.  The current issue of the Economist has an essay, “The Way Ahead,” in which Mr. Obama identifies several challenges:

  • Boosting productivity growth. The above chart from his essay shows how much productivity growth has declined in the last ten years. He claims that the corresponding lack of investment is caused by an anti-tax ideology which rejects new funding for public projects, which in turn can be blamed on a fixation on deficits in spite of our skyrocketing debt problem. The House plan correctly identifies tax and regulatory reform as what are needed for progress.
  • Combatting rising inequality. An expanded Earned Income Tax Credit will definitely help here but mainly what is needed is overall faster economic growth.
  • Insuring that everyone who wants a job can get one. Wage insurance and better retraining programs for laid off workers are good ideas. But again, faster economic growth is what is really needed.
  • Building a resilient economy which is primed for future growth. Mr. Obama says that “America should also do more to prepare for future shocks before they occur.” This is exactly why we urgently need to start shrinking our debt now before the shock of higher interest rates leads to huge increases in interest payments on our rapidly growing debt.

Conclusion. Let’s give Mr. Obama credit for avoiding another depression after the Financial Crisis. But his poor policies are to blame for the very slow rate of recovery ever since.

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