Tag Archives: fiscal crisis

After the New Tax Law: Debt Is an Even Bigger Problem

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The Republicans in Washington are exuberant because passing the new tax law means that they finally have gotten something done. And the new law will have at least one highly beneficial effect:

  • The new 21% corporate tax rate will increase profits for domestic corporations and encourage multinational corporations to bring their foreign profits back home. Even if these profits are used to buy back company stock or are paid out in larger dividends, the new money will be put to use in the U.S. economy one way or another. This will give the economy a boost and create new and better paying jobs. This is how private enterprise works and it is the best economic system ever invented.

But at the same time the new law has two huge deficiencies which make it a net minus on the whole:

  • It adds $1 trillion to our debt over the next ten years, as scored by the joint Committee for Taxation, the official scorekeeper. And this is after the positive economic effect is taken into account.  Our debt is already 77% of GDP (for the public part on which we pay interest), the highest it has been since right after WWII, and will continue to get worse without major changes in public policy. As interest rates rise and return to normal historical levels, interest payments on the debt will increase quickly, creating a huge drain on the federal budget.

  • The trillion dollar artificial stimulus created by the new tax law, i.e. the trillion dollars in new debt, is likely to overheat the economy, which is now already growing at a 3% annual clip.  This means that inflation is likely to gain increased momentum, thereby causing the Federal Reserve to raise interest rates faster than it otherwise would. This means that interest payments on the debt will be pushed up even faster than otherwise. Without fiscal retrenchment, a new fiscal crisis is virtually inevitable in the relatively near future.

Conclusion. Fiscal restraint in Congress is now more urgently needed than ever, and it is going to be even harder to accomplish than before the new tax law was passed. I am an eternal optimist but it sure would be easy to get discouraged!

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The Dangers of Complacency

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My last post, “What Ails America? I. Complacency,” lays out the thesis of the economist Tyler Cowen that American society has become much too complacent, i.e. self-satisfied, in recent years.  In particular:

  • Fewer Americans are moving.
  • Segregation (by income, education, social class and race) is increasing.
  • Americans have stopped creating. New business creation is down and monopolies are getting stronger.
  • Matching (i.e. assortative mating) is on the upswing.
  • Calm and safety above all is the predominant attitude.

These societal trends are normal and even desirable in many respects. But they can lead to stagnation.  Eventually needed social change will boil over in uncontrollable ways and America will undergo a “Great Reset.”


This will likely involve major events such as:

  • A major fiscal and budgetary crisis. Currently our public debt (on which we pay interest) is 77% of GDP, the highest since just after WWII. It will keep rising steadily without a major change in public policy. When interest rates return to more normal higher levels, interest payments on our debt will be a huge drain, without letup, on our tax revenue.
  • The inability of government to adjust to the next global emergency which comes along. When the financial crisis came along in 2008, debt was at the much smaller level of 38% of GDP. This allowed for temporary fiscal stimulus and larger deficits to ride out the resulting recession. With our currently high debt level, we’ll have far less flexibility when the next recession comes along.
  • A rebellion of many less-skilled men. The median male wage (adjusted for inflation) was higher in 1969 than it is today. In fact, the take-home pay for typical American workers has been falling since the end of the Great Recession in June 2009. To a large extent this explains the rise of Donald Trump.
  • A resurgence of crime. A new crime wave will probably be internet related. There are now tens of millions of identity thefts, phishing attacks and successful but fraudulent pleas for cash every year. Internet crime is calmer than traditional crime and less visible. But the next crime wave could badly damage internet commerce.

 

Conclusion.  Mr. Cowen paints a depressing picture for the future of American society.  Of course, it is possible to turn some or all of these negative developments around.  But will a complacent American populace have the political will to do it?

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Fixing the Debt: Creating a Greater Sense of Urgency

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As I have mentioned before, I am a volunteer for the nonpartisan Washington D.C. think tank “Fix the Debt.”  As such I give presentations to civic organizations in the Omaha area about our debt problem and what we can and should do about it.  I have now given four such talks and have another one coming up next week.
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What is most difficult for me is to try to convey a sense of urgency about addressing this problem. Most people deplore deficit spending in a general sense but not nearly enough people think that dealing with it should take priority over current presumably pressing spending needs such as, for example, depletion of the highway trust fund, expanding military spending, or improving early childhood education, just to be specific.
So here is how I am going to try to create a greater sense of urgency.  Several months ago I had a post entitled, “The Slow Growth Fiscal Trap We’re Now In” in which I said (in brief summary) that our current economic condition of

  • slow growth means
  • low inflation which leads to
  • low interest rates which in turn leads to
  • massive debt which eventually leads to a new and much more severe
  • fiscal crisis.

This is the predicament we’re now in.  Do we consciously maintain a slow growth economy, with all the unemployment pain and stagnant wages which this entails, or do we speed things up, enabling more people to go back to work, and also deal with the higher inflation and interest rates which this will entail?
Faster growth may well eventually come on its own anyway and then we’ll be forced to fix our fiscal problems at a time when they’ll be much worse than they are now.
Isn’t it clear that it is much better to act now in a responsible manner rather than to wait and have to react hurridly later on when the problem is much worse?

Why the National Debt Is Such a Threat to the U.S.

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In my last post I discussed several commonly held myths about the national debt, along the line that it is a fairly minor problem that can easily be solved sometime in the future if we decide that it is important enough to do so.
CaptureThe above chart shows that the debt is already very large by historical standards and that it is projected (by the Congressional Budget Office) to just keep getting worse if we continue on our current path of excessive borrowing to pay our bills.
The national organization, “Fix the Debt” lays out very clearly the reasons why our ever-growing debt level is so harmful:

  • It causes lower wages and fewer job opportunities. The debt will “crowd out” productive investments in people, technology and new ventures. The CBO estimates that wages will grow more slowly if debt is on an upward path compared to a downward path. This will amount to an average $7000 wage cut 25 years from now in the year 2040.
  • It leaves less room for investment in infrastructure, research and the next generation. A growing debt means higher interest payments. The CBO projects that interest payments could nearly quadruple from $220 billion in 2013 to about $800 billion in 2024. That leaves far less for investments in education, infrastructure, research, etc.
  • It increases the likelihood of a fiscal crisis. Failure to get the national debt under control could precipitate a crisis where investors are no longer willing to loan money to the government at affordable rates. This could mean large investment losses, tanking markets, mass unemployment, rapid inflation, etc.
  • It means a missed opportunity to grow the economy. Deficit reduction legislation presents an opportunity to enact pro-growth tax reform, improve programs to reward work, re-orient spending to important investments, and capture the economic benefits of putting the debt on a sustainable path.

 

Let’s hope and pray that our national leaders appreciate the urgent nature of the debt problem and have the political courage to do something serious about it!